A company constructs a building for its own use. Construction began on January 1

Question

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $660,000; March 31, $760,000; June 30, $560,000; October 30, $1,080,000. To help finance construction, the company arranged a 7% construction loan on January 1 for $1,020,000. The company’s other borrowings, outstanding for the whole year, consisted of a $2 million loan and a $4 million note with interest rates of 9% and 6%, respectively. Assuming the company uses the weighted-average method, calculate the amount of interest capitalized for the year. (

Explanation / Answer

Calculate average accumlated expenditure :

Weighted average rate :

Weighted average rate = 491400*100/7020000 = 7%

Amount of interest capitazed for the year = 1780000*7% = $124600

Expense Weight AAE Jan 1 660000 660000*12/12 660000 March 31 760000 760000*9/12 570000 June 30 560000 560000*6/12 280000 Oct 30 1080000 1080000*3/12 270000 Total 1780000

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