Yahoo Answers is shutting down on May 4th, 2021 (Eastern Time) and beginning April 20th, 2021 (Eastern Time) the Yahoo Answers website will be in read-only mode. There will be no changes to other Yahoo properties or services, or your Yahoo account. You can find more information about the Yahoo Answers shutdown and how to download your data on this help page.
Trending News
Accounting journal entries?
A company begins construction on a building on January 1, 2007. The company finances the construction with:
a $500,000 construction specific note for 3 years with 10% interest;
a $100,000 not for 5 years with 7% interest;
a $50,000 not for 10 years with 6% interest.
The avoidable interest amount is $52,000
which journal entry is correct?
(A)
Interest expense(DB)52,000
Cash (CR) 52,000
(B)
Expense (DB) 60,000
Cash (CR) 60,000
(C)
Building [capitalized interest] (DB)52,000
Interest Expense (DB) 60,000
Cash (CR) 112,000
(D)
Building [capitalized interest] (DB) 52,000
Interest Expense (DB) 8,000
Cash (CR) 60,000
The question is which journal entry is recorded on December 31, 2007
2 Answers
- ProfLv 77 years agoFavorite Answer
Entry D is correct. Interest on construction has to be capitalized, which means all $50,000 of interest on the $500,000 loan becomes part of the building cost. Another $2,000 of interest could have been avoided if the company had not been building. So $2,000 of the $100,000 note is also capitalized. That leaves $8,000 of interest to be recorded as interest expense on the two notes.
The first two entries are obviously wrong because they don't capitalize any interest. Entry C is obviously wrong because the total amount of interest incurred in the year is only $60,000, therefore the cash credit would be limited to $60,000. Any additional cash paid would have to reduce the principal of one or more notes, but the notes are not included in the entry.
