Comprehensive
Response to the following problem:
The Foothills Power Company begins a two-year construction project on a power plant on January 1, 2010.
The following information is available:
1. The company borrows $10 million on January 1, 2010, at 12%, specifically for use on the project.
2. The company's other borrowings are:
$20 million at 10%
$60 million at 8%
3. The expenditures for the project, incurred evenly each year (excluding capitalized interest from previous years), are as follows:
$6,000,000 in 2010
$11,460,000 in 2011
$1,800,000 in 2012
4. The project is completed on March 31, 2012. It took longer than originally planned because the company suspended construction for the last three months of 2010 because of a concern about the salability of the electricity produced by the plant.
5. Because of reduced demand for electricity, the plant does not begin operations until October 1, 2012.
6. The company invests at 11% the unused amounts of the $10 million borrowed in item 1.
7. Assume all transactions are in cash unless otherwise indicated.
Required
1. Prepare all the necessary journal entries for each of the three years. Record all construction costs in a Construction in Progress inventory account.
2. How would your answer to Requirement 1 change if the three-month suspension in the construction activity was due to an environmental dispute with the federal government?