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August 23, 2021 at 3:48 am #6325797fsa
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How are you?
I hope you are well and safe,
first of all I would like to thank you for your appreciated time and effort.
Could you please, check out my work out of the following journal entries (J.V) regarding the following example ?
Question source: Test your understanding 6 in Kaplan textbook
Wilson received an $18Million %5 loan on 1 January 20×8 to finance construction of a new factory. As the funds were not all required immediately Wilson invested $6 million in %2 bonds until 32 May 20X8 .
Construction of the factory began on 1 March 20X8 and was completed on 31 December 20X8 .
Required: Calculate the amount of interest to be capitalised in respect of the factory as at 31 December 20X8.
SOLUTION AS PER MY UNDERSTANDING.
First of all we are going to get expense the interest of pre-construction.
interest expense per month =$18,000,000*5%*(1/12)=$75,000
so, we should get expense the interest to statement of profit or loss for the first 2 months since the construction hasn’t been started.
Dr interest expense(SPL) $150,000
Cr interest payable(SFP) $150,000
then, we should capitalise the cost of loan interest for the period form March 1 till the end of the year Dec 31 for 20X8.
the total interest to be capitalised =$75,000 * 10 Months =$750,000
Dr Construction (SFP) $750,000
Cr interest payable(SFP) $750,000
since, we the total loan hasn’t been used in constructing the building and they have invested in the %2 so, the amount invested need to be net-off the interest which is capitalised to the construction to just capitalise the net of the interest.
First: the investment income should be recognised in the profit or loss statement for the pre-construction period of January and February.
Dr Bank/interest receivables(SFP) $20,000
Cr Investment income(SPL) $20,000
as per the example we are going to capitalise 3 moths form March 1 till May 31 of the investment income to the construction as follow,
interest to be capitalised =$6,000,000*%2*(3/12)=$30,000
Dr Bank/interest receivable (SFP) $30,000
Cr Construction (SFP) $30,000
so, the net interest to be capitalised to the construction as follow
interest to be capitalised to the construction $750,000
interest income to be net-off ($30,000)
the net interest to be capitalized to construction =$720,000
Could you check out my journal entries (J.V).
Thank you in advance.August 29, 2021 at 11:04 am #633350P2-D2Keymaster
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Again, sorry, but I do not have the time to look through each of the answers to the questions you have attempted. You need to compare your answers to a model answer. If there is then something that you do not understand then I’ll happily help you out.
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