On July 31, 2012, Bismarck Company engaged Duval Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun 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 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. |
| Interest revenue |
$ |
| Weighted-average accumulated expenditures |
$ |
| Avoidable interest |
$ |
| Interest capitalized |
$ |
| (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. |
| Date |
Description/Account |
Debit |
Credit |
| 7/31 |
Trading securitiesMachineInterest revenueInterest expenseInterest payableCashNote payable |
|
|
|
MachineInterest expenseCashTrading securitiesInterest revenueInterest payableNote payable |
|
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CashMachineNote payableTrading securitiesInterest payableInterest revenueInterest expense |
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MachineInterest revenueInterest expenseInterest payableTrading securitiesNote payableCash |
|
|
|
Note payableCashMachineInterest payableTrading securitiesInterest revenueInterest expense |
|
|
| 11/1 |
Interest expenseCashTrading securitiesInterest revenueInterest payableNote payableMachine |
|
|
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Interest revenueInterest expenseInterest payableTrading securitiesCashNote payableMachine |
|
|
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Trading securitiesNote payableCashMachineInterest revenueInterest expenseInterest payable |
|
|
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Interest revenueInterest expenseMachineInterest payableCashTrading securitiesNote payable |
|
|
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Interest payableInterest revenueNote payableCashMachineTrading securitiesInterest expense |
|
|
| 12/31 |
CashInterest revenueInterest payableInterest expenseMachineNote payableTrading securities |
|
|
|
MachineCashInterest payableNote payableTrading securitiesInterest revenueInterest expense |
|
|
|
Interest revenueInterest payableInterest expenseCashNote payableMachineTrading securities |
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Note payableTrading securitiesInterest expenseInterest revenueInterest payableCashMachine |
|