On July 31, 2020, Cullumber Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction begun immediately and was completed on November 1, 2020. To help finance construction, on July 31 Cullumber issued a $324,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $216,000 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, Cullumber made a final $108,000 payment to Minsk. Other than the note to Netherlands, Cullumber’s only outstanding liability at December 31, 2020, is a $29,500, 8%, 6-year note payable, dated January 1, 2017, on which interest is payable each December 31.Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2020.

a. Interest revenue = $2,700

b. Weighted-average accumulated expenditures = $54,000

c. Avoidable interest = $6,480

d. Total interest cost to be capitalized = $6,480

Explanation:

The computation of interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized is shown below:-

a. Interest revenue = (Issued notes payable - Interest payable) × Short-term marketable securities × From 1 Aug to 31 Oct ÷ Total number of months in a year

= ($324,000 - $216,000) × 10% × 3 months ÷ 12

= $108,000 × 10% × 3 months ÷ 12

= $2,700

b. Weighted-average accumulated expenditures = Interest payable × Short-term marketable securities × From 1 Aug to 31 Oct ÷ Total number of months in a year

= $216,000 × 3 months ÷ 12

= $54,000

Here we will not consider 1 Nov because it contains 0 months so answer is $54,000

c. Avoidable interest = Weighted-average accumulated expenditures × Notes payable percentage

= $54,000 × 12%

= $6,480

d. Total interest cost to be capitalized = Weighted-average accumulated expenditures × Notes payable percentage

= $54,000 × 12%

= $6,480

We simply applied the above formulas

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