Question - Capitalization of Interest
On July 31, 2010, 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, 2010. 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, 2010, is a $30,000, 8%, 6-year note payable, dated January 1, 2007, 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 2010. 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, 2010.
(2) November 1, 2010.
(3) December 31, 2010.