CAPITALIZED INTEREST

Assume that in December 2018, management at Stark Enterprises decided to build a new Avengers headquarters. The company hires Marvel, Inc. to design and construct the new facility. Construction activities began on Jan 1, 2019 and were to be completed on the last day of the year. Stark made the following payments to Marvel Inc. during 2019:

Date Payment

June 1 $6,000,000

August 31 9,000,000

December 31 7,500,000

In order to help finance the construction, Stark issued the following during 2019:

1. $5,000,000 of 10-year, 9% note payable, issued on May 31, 2019

2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2019

In addition to the 9% bonds payable, the only debt outstanding during the year was an $4,000,000, 12%, 10-year bond payable due December 31, 2021 and an $4,000,000, 11%, 5-year bond payable due December 31, 2022.

What is avoidable interest and actual interest, respectively?

A.

$1,370,000 and $622,500

B.

None of the above

C.

$622,500 and $1,182,500

D.

$622,500 and $1,370,000

The difference between actual and avoidable interest will be recorded as:

A.

None of the above

B.

a Credit to Interest expense

C.

a Debit to Construction in Progress

D.

a Debit to Interest Expense

The total cost of Avengers headquarters recorded on the 12/31 balance sheet is :

A.

$22,500,000

B.

None of the above

C.

$23,122,500

D.

$622,500