Cheshire Cat Company contracted with White Rabbit Construction to build a storag

Question

Cheshire Cat Company contracted with White Rabbit Construction to build a storage warehouse in 2015. Construction began on April 1^st at which tune Cheshire Cat paid S60,000. Cheshire Cat then made additional payments as follows, based upon progress made toward completion of the construction: June 1 September 1 December 1 December 31 dollar 75,000 85.000 45.000 50.000 Cheshire Cat borrowed dollar 100,000 specifically for this project at 8 percentage interest. The company also had the following general purpose borrowings throughout the year: General Purpose Debt A: dollar 1,000,000 at 8 percentage General Purpose Debt B: dollar 500.000 at 6 percentage Assume that the building was completed on December 31, 2015. Required: How much interest should be capitalized on this building? What amount would be in the building account at the tune the building was completed? Suppose Cheshire Cat had no general purpose borrowings. How much interest would be capitalized then?

Explanation / Answer

Answer Part A Payment Date Expenditure Capitalization period Weight Weighted Expenditure 04/01/15 60000.00 9 months 0.75 45000.00 06/01/15 75000.00 7 months 0.58 43750.00 09/01/15 85000.00 4 months 0.33 28333.33 12/01/15 45000.00 1 months 0.08 3750.00 12/31/15 50000.00 0 months 0.00 0.00 Total 315000.00 120833.33 Part B Principal Rate interest Debt A 1000000 8.00% 80000 Debt B 500000 6.00% 30000 1500000 110000 Weighted Avg int rate '= 110000/1500000 Weighted Avg int rate 7.33% Part C Funding Amount Rate Interest Capitalized Specific Loan 100000.00 8.00% 8000.00 General Loan 20833.33 7.33% 1527.08 Total 120833.33 9527.08 Answer (a) Interest of $ 9527.08 should be capitalized Answer (b) In Building account amount will be 315000+9527.08 = $ 324527.08 Answer (c) If no General Purpose borrowing, interest of $ 6000 should be capitalized

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