Exercise 11-11 Capitalizing interest (LO 11-2)
Kobe Company began constructing a building for its own use in February 20X1. During 20X1, Kobe incurred interest of $70,000 on specific construction debt and $15,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $60,000.



Required:

1a. What amount of interest should Kobe capitalize?

1b. Prepare the journal entry to record payment of the interest.

2. If interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was instead $90,000, what amount of interest should Kobe capitalize?

1a. Kobe should capitalize $60,000 of interest.

1b. The journal entry to record payment of the interest would be:

Interest Expense 60,000 and Interest Payable 60,000

2. Kobe should still capitalize $70,000 of interest.

What is an interest?

1a. The amount of interest that Kobe should capitalize is the lesser of the actual interest incurred on the specific construction debt, which is $70,000, and the amount of interest computed on the weighted-average amount of accumulated expenditures, which is $60,000. Therefore, Kobe should capitalize $60,000 of interest.

1b. The journal entry to record payment of the interest would be:

Interest Expense 60,000

Interest Payable 60,000

2. If interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was instead $90,000, Kobe would still only capitalize the lesser of the actual interest incurred on the specific construction debt, which is $70,000, and the amount of interest computed on the weighted-average amount of accumulated expenditures, which is $90,000. Therefore, Kobe should still capitalize $70,000 of interest.

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