Problem 1 -(16 Marks)
In early February 2011, Johnson Inc. began construction of an addition to its head office
building that is expected to take 18 months to complete. The following 2011
expenditures relate to the addition:
Feb 1 Payment #1 to contractor
Mar 1 Payment to architect
July 1 Payment #2 to Contractor
Dec 1 Payment #3 to Contractor
$200,000
28,000
260,000
140,000
Dec 31 Asset Carrying Amount
$628.000
On February 1, Johnson issued a $250,000 three-year note payable at a rate of 12% to
finance most of the costs to the contractor. No other asset-specific debt was entered
into. Details of other interest-bearing debt during the period are provided in the table
below:
Other debt instruments outstanding -2011
Principal Amount
7% 10-year bonds, issued June 15, 2005
$500,000
6% 12-year bonds, issued May 1, 2011
300,000
9% 15-year bonds, issued May 1, 1996, matured May 1, 2011 300,000
Required:
1. Calculate Weighted Average Accumulated Expenditures (5 Marks)
2. Calculate Average Interest Rate on Other Debt (5 Marks)
3. Calculate Avoidable Interest (4 Marks)
4. Prepare the journal entry required to capitalize interest costs on
construction. (2 Marks)

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