On January 2, 2014, Indian River Groves began construction of a new citrus proce

Question

On January 2, 2014, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2015. Expenditures for the construction were as follows: January 2, 2014 $ 400,000 September 1, 2014 1,200,000 December 31, 2014 1,200,000 March 31, 2015 1,200,000 September 30, 2015 800,000 Indian River Groves borrowed $2,200,000 on a construction loan at 12% interest on January 2, 2014. This loan was outstanding during the construction period. The company also had $8,000,000 in 9% bonds outstanding in 2014 and 2015. The interest capitalized for 2014 was:

Explanation / Answer

Computation of Average loan utilized during the calendar year 2014:

Average loan utilized during the year = Weighted Average of expenditure incurred during the year

= $9600000/12

= $800000

Interest on loan taken for the purpose of construction = 12 %

Rate of interest should be taken as 12% as it is specially taken for the purpose of construction.

Therefore, interest to be capitalised for the year 2014 = $800000* 12%

= $96000

Expenditure Date Cumulative Expenditure Weights based on months Weight * Amount $400000 02-01-2014 $400000 8 $3200000 $1200000 01-09-2014 $1600000 4 $6400000 $1200000 31-12-2014 $2800000 0 0 12 $9600000

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