. On July 31, 2015, Bismarck Company engaged Duval Tooling Company
to construct a special-purpose piece of factory machinery. Construction began immediately and
was completed on November 1, 2015. 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 (trading securities)
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, 2015,
is a $30,000, 8%, 6-year note payable, dated January 1, 2012, on which interest
is payable each December 31.
Instructions
(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable
interest, and total interest cost to be capitalized during 2015. (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, 2015.
(2) November 1, 2015.
(3) December 31, 2015.
(a)
Interest revenue:
- $300,000 x 10% x 4/12 = $10,000
- $100,000 x 12% x 2/12 = $2,000
Total interest revenue = $10,000 + $2,000 = $12,000
Weighted-average accumulated expenditures:
- $300,000 x 4/12 + $100,000 x 2/12 = $100,000
Avoidable interest:
- $100,000 x 12% = $12,000
Total interest cost to be capitalized:
- $12,000
(b)
(1) July 31, 2015:
Interest Expense...........$12,000
Interest Payable (WNB)...........$12,000
To record interest on the note payable to Wellington National Bank.
(2) November 1, 2015:
Notes Payable...........$100,000
Cash...........$100,000
To record final payment to Duval Tooling Company.
(3) December 31, 2015:
Interest Expense...........$30,000
Interest Payable...........$30,000
To record interest on the 8%, 6-year note payable.