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On July 31, 2017, Tamarisk Company engaged Minsk Tooling Company to construct a special-purpose...

Question:

On July 31, 2017, Tamarisk 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 Tamarisk issued a $296,400, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $190,400 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, Tamarisk made a final $106,000 payment to Minsk. Other than the note to Netherlands, Amsterdam's only outstanding liability at December 31, 2017, is a $31,800, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Required:

1. Calculate the following:

a. interest revenue

b. weighted-average accumulated expenditures

c. avoidable interest

d. total interest cost to be capitalized during 2017

2. Prepare the journal entries needed on the books of Tamarisk Company at each of the following dates:

a. July 31. 2017

b. November 1, 2017

c. December 31, 2017

Long Term Notes:

Long term notes are liabilities which are issued by the companies to generate money to finance long term asset. The money is repaid along with the interest expense at the time of the maturity.

Answer and Explanation:

1.

Date Expenditure Capital Period WAAE (Weighted Average Accumulated Expenditure)
July 31 $190,400 3/12 $47,600
Nov. 1 $106,000 0 0
WAAE (Weighted Average Accumulated Expenditure) $47,600

Avoidable Interest = $47,600 * 12%

Avoidable Interest = $5,712

Actual Interest:

{eq}Construction \ = \ \$296,400 \ \times \ 12\% \ \times \ \frac{5}{12} \\ Construction \ = \ \$14,820 {/eq}

Other = $31,800 * 8%

Other = $2,544

Total = Construction + Other

Total = $14,820 + $2,544

Total = $17,364


2.

Date Account Titles Debit (in $) Credit (in $)
July 31, 2017 Cash 296,400
Notes Payable 296,400
(To record the note)
July 31, 2017 Machinery 190,400
Marketable Securities 106,400
Cash 296,400
(To record the Payment to Minsk)
Nov. 1, 2017 Cash 108,650
Interest Revenue 106,000
Marketable Securities 2,650
(Interest Revenue = $106,000 * 10% * 3/12)
(To record the proceeds from Investment)
Nov. 1, 2017 Machinery 106,000
Cash 106,000
(To record the payment to Minsk)
Dec. 31, 2017 Machinery 5,712
Interest Expense 11,652
Cash 2,544
Interest Payable 14,820

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

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