Reference no: EM13872360

Purpose: This exercise will provide an example of the capitalization of interest cost incurred during construction.

Marvel Company engaged Invention Company to construct a special purpose machine to be used in its factory. The following data pertain:

1. The contract was signed by Marvel on August 30, 2014. Construction was begun immediately and was completed on December 1, 2014.

2. To aid in the financing of this construction, Marvel borrowed $600,000 from Bank of Okahumpa on August 30, 2014 by signing a $600,000 note due in 3 years. The note bears an interest rate of 12% and interest is payable each August 30.

3. Marvel paid Invention $200,000 on August 30, 2014, and invested the remainder of the note's proceeds ($400,000) in 5% government securities until December 1.

4. On December 1, Marvel made the final $400,000 payment to Invention.

5. Aside from the note payable to the Bank of Okahumpa, Marvel's only outstanding liability at December 31, 2014 is a $60,000, 9%, 5-year note payable dated January 1, 2012, on which interest is payable each December 31.

Instructions

(a) Calculate the weighted-average accumulated expenditures, interest revenue, avoidable interest, total interest incurred, and interest cost to be capitalized during 2014. Round all computations to the nearest dollar.

(b) Prepare the journal entries needed on the books of Marvel Company at each of the following dates: August 30, 2014; December 1, 2014; and December 31, 2014.