Early in 2020, Gibbs Corporation constructed a specialized piece of equipment for their business. Construction began on
Question:
Early in 2020, Gibbs Corporation constructed a specialized piece of equipment for their business. Construction began on June 1, 2020 and was completed on December 31, 2020. Gibbs made the following payments during 2020:
Date Payment
June 1, 2020 $2,000,000
August 31, 2020 3,000,000
December 31, 2020 2,500,000
In order to help finance the construction, Gibbs issued the following during 2020:
1. $1,700,000 of 10-year, 9% bonds payable, issued at par on January 1, 2020, with interest payable annually on January 1.
2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2020.
Other debt outstanding:
1. $425,000 note payable, 12%, dated January 1, 2016 and due January 1, 2023.
2. $1,400,000 bond payable, 10%, bonds payable, issued January 1, 2000, and maturing in 2050.
Instructions
Compute the amounts of each of the following (show and label computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost
(round to the nearest dollar).
2. Actual Interest
3. Weighted-Average Interest Rate (use 4 decimal places 0.0000)
4. Avoidable interest incurred during 2020 (round to the nearest dollar).
5. Total amount of interest cost to be capitalized during 2020.
6. Journal entry to record the interest (interest will be paid in 2021).
7. What is the value of the completed Equipment?
8. If the equipment is expected to have a useful life of 10 years, what would be the book value,
after the adjusting entries, on December 31, 2021.
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart