Problem 4Acme, Inc., a subsidiary of J & J, during 2015, began andcompleted a...Problem...

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Accounting

Problem 4
Acme, Inc., a subsidiary of J & J, during 2015, began andcompleted a small warehouse. Construction on the warehouse beganJanuary 2, of 2015. Expenditures were made as follows: January 2,$1,000,000, March 1, $900,000, July 1, $400,000 and Oct. 1,$800,000. J & J financed the project by issuing $1,000,000 instock at the beginning of 2015 and borrowed $1,200,000 from TheLast National Bank at an interest rate of 8%. In addition, Acme hadthe following debt: $1,000,000, interest rate of 9% borrowed in2010, $2,000,000, 10% note borrowed in 2012.
Requirements:
a. Calculate the 2015 weighted average accumulatedexpenditures
b. How much is avoidable interest
c. How much is actual interest
d. Make the entry capitalizing the interest.
Note, interest is not paid on stock. Please show all yourcalculations. thanks.

Answer & Explanation Solved by verified expert

4.0 Ratings (662 Votes)

1	Weighted average accumulated expenditure:
			Amount	Months	Weighted Average expenses

	Jan 2.Expenses		1000000	12	(1000000*12/12)=1000000
	Mar 1.Expenses		900000	10	(900000*10/12)=750000
	July 1.Expenses		400000	6	(400000*6/12)=200000
	Oct 1.Expenses		800000	3	(800000*3/12)=200000
	Total					2150000

	Month is calculated from the date of expenditure incurred till Dec 31.

2	Avoidable interest
				Amount of loan	Interest %	Avoidable Interest
				1	2	1*2
	Specific debt			1200000	8%	96000
	General debt
	9% loan			1000000	9.67%	96700
	10% note			2000000	9.67%	193400
					(Note:1)
	Total avoidable interest					386100

	Weighted average interest rate for general debt:
				Amount of loan	Interest %	Interest
	9% loan			1000000	9%	90000
	10% note			2000000	10%	200000
				3000000		290000

	Weighted average interest rate=Total interest expenses/Total amount of loan=290000/3000000=0.0967=9.67%

3	Actual interest:
				Amount of loan	Interest %	Avoidable Interest
				1	2	1*2
	Specific debt			1200000	8%	96000
	General debt
	9% loan			1000000	9.00%	90000
	10% note			2000000	10.00%	200000

	Total actual interest					386000

4	Journal entry
	Date	Account tilts and explanation				Debit	Credit
	Dec 31.	Construction in progress-Warehouse				290000
		Interest payable					290000
		(Capitalizing interest)
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In: AccountingProblem 4Acme, Inc., a subsidiary of J & J, during 2015, began andcompleted a...Problem 4Acme, Inc., a subsidiary of J & J, during 2015, began andcompleted a small warehouse. Construction on the warehouse beganJanuary 2, of 2015. Expenditures were made as follows: January 2,$1,000,000, March 1, $900,000, July 1, $400,000 and Oct. 1,$800,000. J & J financed the project by issuing $1,000,000 instock at the beginning of 2015 and borrowed $1,200,000 from TheLast National Bank at an interest rate of 8%. In addition, Acme hadthe following debt: $1,000,000, interest rate of 9% borrowed in2010, $2,000,000, 10% note borrowed in 2012.Requirements:a. Calculate the 2015 weighted average accumulatedexpendituresb. How much is avoidable interestc. How much is actual interestd. Make the entry capitalizing the interest.Note, interest is not paid on stock. Please show all yourcalculations. thanks.