Reference no: EM133147966
Question - ACY Limited engaged a contractor to design and construct a building in 2022. Construction began on 1 January 2022 and was completed on 31 December 2022. Expenditures incurred were $2,400,000 on 1 January (this payment includes the land costing $200,000 and the removal cost of the old building $50,000), $1,980,000 on 1 June, and $3,000,000 on 31 December.
ACY borrowed $3,000,000 on 1 January 2022 with a 5-year, 12% note to help finance construction of the building. In addition, the company had two general borrowings outstanding all year a 10%, 3-year, $2,400,000 note payable and an 11%, 4-year, $4,500,000 note payable. All interest accrued for 2022 were paid during 2022. The construction was substantially completed and the building was ready for use on 31 December 2022. Each financial year ends on 31 December.
In your calculation steps, you shall take the precision level of two decimal places in amount / dollar / percentage, if applicable (for example, $12.345 shall be rounded as $12.35; while 1.234% shall be rounded as 1.23%). However, round your answers to the nearest integer with no decimal place, if applicable.
Required -
(a) Advise as to whether each of the amounts of the expenditure incurred on 1 January 2022 shall be included as a cost for the land and/or for the building.
(b) Calculate the amount of interest to capitalize for 2022. Show your workings.
(c) Prepare the journal entries for ACY to recognize the actual interest expense incurred and to capitalize the interest costs for 2022.
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