Question
On May 1, 2020, Educational Institute X contracted Technology Solutions Inc. to set up a new computer lab for $500,000. Educational Institute X made payments
On May 1, 2020, Educational Institute X contracted Technology Solutions Inc. to set up a new computer lab for $500,000. Educational Institute X made payments for the setup as follows: June 1, $150,000, August 1, $200,000, October 1, $150,000. The setup was completed, and the computer lab was operational on October 31, 2020. Educational Institute X had the following outstanding debt as of December 31, 2020:
i) 8% four-year note to finance the setup, dated May 1, 2020, with interest payable annually on December 31. Principal amount: $300,000. ii) 5% six-year note payable, dated May 1, 2018, with interest payable annually on December 31. Principal amount: $200,000.
Required: i) Determine the amount of interest to be capitalized in 2020 in relation to the computer lab setup. (6 marks) ii) Prepare journal entries for Educational Institute X during 2020.
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