Question

On December 31, 2019, Novak Inc. borrowed $3,300,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $396,000; June 1, $660,000; July 1, $1,650,000; December 1, $1,650,000. The building was completed in February 2021. Additional information is provided as follows.

1.		Other debt outstanding
		10-year, 14% bond, December 31, 2013, interest payable annually		$4,400,000
		6-year, 11% note, dated December 31, 2017, interest payable annually		$1,760,000
2.		March 1, 2020, expenditure included land costs of $165,000
3.		Interest revenue earned in 2020		$53,900

Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

The amount of interest

$

  

  

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020

Answer 1

Solution a:

Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01-Mar	$3,96,000	10/12	$3,30,000
01-Jun	$6,60,000	7/12	$3,85,000
01-Jul	$16,50,000	6/12	$8,25,000
01-Dec	$16,50,000	1/12	$1,37,500
Total	$43,56,000		$16,77,500
*Interest rate			13%
Interest capitalized in 2017			$2,18,075

Solution b:

Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$33,00,000	13%	$4,29,000
14% Bond	$44,00,000	14%	$6,16,000
11% Note	$17,60,000	11%	$1,93,600
Total interest incurred			$12,38,600
Less: Interest Capitalized			$2,18,075
Interest Expense			$10,20,525

Date	Accounts Title	Debit	Credit
31-Dec	Building	$2,18,075
	Interest expense	$10,20,525
	Cash		$12,38,600