Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 10: Q11Q (page 531)

Question: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?

Short Answer

Expert verified

Answer

Interest capitalized disclosed along with the interest expensed in the financial statement. Interest revenue from the temporary invested excess fund treat as

Step by step solution

01

Disclosure of interest capitalization

Company discloses the total interest in the notes to financial statement. Company discloses the interest capitalized and interest treated as expense separately.

02

Interest revenue of temporary invested excess fund

Company borrows the money to finance the construction of the assets. Company do not need the all borrowed fund in starting so company invest the excess fund as temporary investment. Company treats the interest revenue from this investment as normal interest revenue

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Nonmonetary Exchange) Carlos Arruza Company exchanged equipment used in its manufacturing operations plus \(3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.

Carlos Arruza Co.

Tony LoBianco Co.

Equipment (cost)

\)28,000

$28,000

Accumulated depreciation

19,000

10,000

Fair value of equipment

12,500

15,500

Cash given up

3,000

Instructions

  1. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
  2. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Question: What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?

Question: One financial accounting issue encountered when a company constructs its own plant is whether the interest cost on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?

(Capitalization of Interest) On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a \(300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. \)200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final \(100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2017, is a \)30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Instructions

(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

(1) July 31, 2017.

(2) November 1, 2017.

(3) December 31, 2017.

(Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.

  1. Dorsett Company offered to exchange a similar machine plus \(23,000. (The exchange has commercial substance for both parties.)
  2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
  3. Liston Company offered to exchange a similar machine, but wanted \)3,000 in addition to Holyfield’s machine. (The exchange has commercial substance for both parties.)

In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay \(93,000 in addition to trading in its old machine.

Holyfield

Dorsett

Winston

Liston

Greeley

Machine cost

\)160,000

\(120,000

\)152,000

\(160,000

\)130,000

Accumulated depreciation

60,000

45,000

71,000

75,000

–0–

Fair value

92,000

69,000

92,000

95,000

185,000

Instructions

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.
See all solutions

Recommended explanations on Business Studies Textbooks

Corporate Finance

Read Explanation

Influences On Business

Read Explanation

Organizational Behavior

Read Explanation

Operational Management

Read Explanation

Strategic Analysis

Read Explanation

Financial Performance

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free