Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Vania Magazines started construction of a warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2019, and completed the

Vania Magazines started construction of a warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2019, and completed the building on December 31, 2019. During the construction period, Vania has the following debt obligations outstanding.

Construction loan12% interest, payable semiannually, issued December 31, 2018$2,000,000Short-term loan10% interest, payable monthly, and principal payable at maturity, on May 30, 20201,400,000Long-term loan11% interest, payable on January 1 of each year; principal payable on January 1, 20221,000,000

Total cost amounted to $5,200,000, and the weighted average of accumulated expenditures was $3,500,000.

Jane Esplanade, the president of the company, has been shown the costs associated with this construction project and capitalized on the balance sheet. She is bothered by the "avoidable interest" included in the cost. She argues that, first, all the interest is unavoidableno one lends money without expecting to be compensated for it. Second, why can't the company use all the interest on all the loans when computing this avoidable interest? Finally, why can't her company capitalize all the annual interest that accrued over the period of construction?

You are the manager of accounting for the company. In a memo, explain what avoidable interest is, how you computed it (being especially careful to explain why you used the interest rates that you did), and why the company cannot capitalize all its interest for the year. Attach a schedule supporting any computations that you use.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfiel

17th edition

1119503663, 1119571480, 1-119-50368-2, 111950368X, 978-1119503668

More Books

Students also viewed these Accounting questions

Question

How do rituals and routines express organizational values?

Answered: 1 week ago