Question

On December 31, 2019, Novak Inc. borrowed $4,020,000 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, $482,400; June 1, $804,000; July 1, $2,010,000; December 1, $2,010,000. 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 $5,360,000 6-year, 11% note, dated December 31, 2017, interest payable annually $2,144,000 2. March 1, 2020, expenditure included land costs of $201,000 3. Interest revenue earned in 2020 $65,660 X Your answer is incorrect. Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building. The amount of interest $ 599593 eTextbook and Media List of Accounts

Answer 1

Solution 1:

Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01-Mar	$4,82,400	10/12	$4,02,000
01-Jun	$8,04,000	7/12	$4,69,000
01-Jul	$20,10,000	6/12	$10,05,000
01-Dec	$20,10,000	1/12	$1,67,500
Total	$53,06,400		$20,43,500
*Interest rate			13%
Interest capitalized in 2020			$2,65,655

Solution 2:

Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$40,20,000	13%	$5,22,600
14% Bond	$53,60,000	14%	$7,50,400
11% Note	$21,44,000	11%	$2,35,840
Total interest incurred			$15,08,840
Less: Interest Capitalized			$2,65,655
Interest Expense			$12,43,185

Date	Accounts Title	Debit	Credit
31-Dec	Building	$2,65,655
	Interest expense	$12,43,185
	Cash		$15,08,840