Financial Accounting Interest Capitalization Questions Homework Help
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1.McPherson Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2012. McPherson expected to complete the building by December 31, 2012. McPherson has the following debt obligations outstanding during the construction period.
Construction loan—12% interest, payable semiannually, issued
December 31, 2011 $2,000,000
Short-term loan—10% interest, payable monthly, and principal payable
at maturity on May 30, 2013 1,600,000
Long-term loan—11% interest, payable on January 1 of each
year; principal payable on January 1, 2016 1,000,000
(a) Assume that McPherson completed the office and warehouse building on December 31, 2012, asplanned at a total cost of $5,200,000, and the weighted average of accumulated expenditures was $3,800,000. Compute the avoidable interest on this project.
(b) Compute the depreciation expense for the year ended December 31, 2013. McPherson elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
2. On December 31, 2011, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2012, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,200,000. Additional information is provided as follows.
1. Other debt outstanding 10-year, 11% bond, December 31, 2005, interest payable annually $4,000,000 6-year, 10% note, dated December 31, 2009, interest payable annually $1,600,000
2. March 1, 2012, expenditure included land costs of $150,000
3. Interest revenue earned in 2012 $49,000
(a) Determine the amount of interest to be capitalized in 2012 in relation to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2012.
3. On July 31, 2012, Bismarck Company engaged Duval Tooling Company to construct a special-purpose piece of factory machinery. Construction began immediately and was completed on November 1, 2012. To help finance construction, on July 31 Bismarck issued a $400,000, 3-year, 12% note payable at Wellington National Bank, on which interest is payable each July 31. $300,000 of the proceeds of the note was paid to Duval on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (debt investments) at 10% until November 1. On November 1, Bismarck made a final $100,000 payment to Duval. Other than the note to Wellington, Bismarck’s only outstanding liability at December 31, 2012, is a $30,000, 8%, 6-year note payable, dated January 1, 2009, on which interest is payable each December 31.
(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2012. Round all computations to the nearest dollar.
(b) Prepare the journal entries needed on the books of Bismarck Company at each of the following dates.
(1) July 31, 2012.
(2) November 1, 2012.
(3) December 31, 2012.
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4. On January 1, 2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $ 1,040,000 March 1, 2016 810,000 June 30, 2016 450,000 October 1, 2016 700,000 January 31, 2017 1,125,000 April 30, 2017 1,440,000 August 31, 2017 2,610,000 On January 1, 2016, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing debt included two long-term notes of $5,900,000 and $7,900,000 with interest rates of 7% and 9%, respectively. Both notes were outstanding during all of 2016 and 2017. Interest is paid annually on all debt. The company’s fiscal year-end is December 31. Required: 1. Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the weighted-average method. (Do not round intermediate calculations. Round your answers to the nearest whole dollars.) 2. What is the total cost of the building? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.) 3. Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements. (Do not round intermediate calculations. Round your answers to the nearest whole dollars.)
5.On July 31, 2014, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2014. To help finance construction, on July 31 Amsterdam issued a $555,600, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $453,600 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final $102,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2014, is a $32,000, 8%, 6-year note payable, dated January 1, 2011, on which interest is payable each December 31. Calculate
b. Weighted-average accumulated expenditures
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