Red Man Construction is constructing a building Construction

Red Man Construction is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, $5,280,000 on June 1, and $8,000,000 on December 31. Red Man borrowed $3,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable prepare all entries that are necessary

Solution

All expenditure made for construction of Building will be Capital expendiure.

Total expenditure made on construction of Building= $6400000+$5280000+$8000000 =$19,680,000

Entry for Loan taken for above on January 1st

Bank Debit $3,200,000

12% Loan Credit $3,200,000

Entries to be made on 31st December

Interest for Loan taken for borrowing = $3,200,000 * 12% = $384,000

Interest on Loan taken for 3 years = $6,400,000* 10% = $640,000

Interesr on Loan taken for 4 year = $12,000,000*11% = $1,320,000

Now since the construction of building was completed on 31st december so the whole interest for the loan taken to help finance construction of the building. will be capitalized.

So the Building Cost will be = $19,680,000+$384,000 = $ 20,064,000   

Entries to be passed on 31st December

1) Building Debit $20,064,000

12% Loan Credit $3,200,000   

Cash/Payable Credit $16,864,000

2) Interest on loan 10% Debit $640,000

3 year Loan Credit $640,000

3) Interest on loan 11% Debit $1,320,000

4 year Loan Credit $1,320,000