Hawkins Corporation began construction of a motel on March 31, 2018. The project

Question

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 30, 2019. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period:

$5,300,000, 6% note
$12,820,000, 10% bonds

Construction expenditures incurred were as follows:

The company’s fiscal year-end is December 31.

Required:
Calculate the amount of interest capitalized for 2018 and 2019. (Round weighted average interest rate to 2 decimal places and final answers to the nearest whole dollar.)

Thank you in advance!

March 31, 2018 $ 3,730,000 June 30, 2018 5,730,000 November 30, 2018 1,746,000 February 28, 2019 2,730,000

Explanation / Answer

Solution:

Weighted average interest rate for captialization purpose = (6% * $5,300,000 / $18,120,000) + (10% * $12,820,000 / $18,120,000)

= 8.83%

Interest to be capitalized in 2018 = $5,808,000 * 8.83% = $512,846

Interest to be capitalized in 2019 = $4,190,333 * 8.83% = $370,006

Construction of Building Schedule of Weighted-Average accumulated expenditure - 2018 Date Amount Current year capitalization period Weighted Average Accumulated Expenditures 31-Mar-18 $3,730,000.00 9/12 $2,797,500.00 30-Jun-18 $5,730,000.00 6/12 $2,865,000.00 30-Nov-18 $1,746,000.00 1/12 $145,500.00 $11,206,000.00 $5,808,000.00

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