the following payments to ABC Construction company during 2018: January 1 $200,000 April 30 $325,000 June 30 $600,000 November 1 $150,000 December 1 $125,000 ABC Construction completed the building, ready for occupancy, on January 5, 2019. UMPI had the following debt outstanding during the construction period: Specific Construction Debt
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On November 1, 2017, UMPI Company contracted ABC Construction Co. to construct a building for $1,400,000. UMPI made the following payments to ABC Construction company during 2018:
January 1 $200,000
April 30 $325,000
June 30 $600,000
November 1 $150,000
December 1 $125,000
ABC Construction completed the building, ready for occupancy, on January 5, 2019. UMPI had the following debt outstanding during the construction period:
Specific Construction Debt
$650,000 15%, 3-year note to finance construction of the building, dated December 31, 2017, with interest payable annually on December 31
Other Debt on the books at time of construction
$450,000 10%, 5-year note payable, dated December 31, 2015, with interest payable annually on December 31
$500,000 12%, 10-year bonds issued December 31, 2014, with interest payable annually on December 31
Instructions:
4.1 Determine the amount of interest to be capitalized in 2018 due to the construction of the building.
4.2 Prepare the
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