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, $520,000; March 31, $620,000; June 30, $420,000; October 30, $660,000. To help finance construction, the company arranged a 9% construction loan on January 1 for $740,000. The company’s other borrowings, outstanding for the whole year, consisted of a $4 million loan and a $6 million note with interest rates of 10% and 6%, respectively.

Assuming the company uses the weighted-average method, calculate the amount of interest capitalized for the year.

Explanation / Answer

The interest cost to be capitalized is the lesser of $110105 (avoidable interest) or $826600 (actual interest). The remaining $716495 (= $826600 – $110105) must be expensed.

Date Expre. Cap period Av.Accumulated Expre. 01-01-2011 520000 12 months 520000 3/31/2011 620000 9 months 465000 6/30/2011 420000 6 months 210000 10/30/2011 660000 2 months 110000 2220000 1305000

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