A company constructs a building fonts own use. Construction began on January 1 a
ID: 2484335 • Letter: A
Question
A company constructs a building fonts own use. Construction began on January 1 and ended on December SO. The expenditures for construction were as follows: January 1, $700,000: March 31, $800.000: June 30, $600.000: October 30, $1200.000. To help finance constructs, the company arranged a 8% construction loan on January 1 for $1,100,000. The company's other borrowings, outstanding for the whole year, consisted of a S7 million loan andaS9 million note with interest rates of 10% and 6%, respectively. Assuming the company uses the specific interest method calculate the amount of interest capitalized for the year. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. 0.1234 should be entered as 12.34%).)Explanation / Answer
Average Accumulated Expenditure
Date
Expenditure
Weight
Average
1-Jan
$ 7,000,000.00
x
12/12
=
$ 7,000,000
31-Mar
$ 8,000,000.00
x
9/12
=
$ 6,000,000
30-Jun
$ 6,000,000.00
x
6/12
=
$ 3,000,000
30-Oct
$ 1,200,000.00
x
2/12
=
$ 200,000
Accumulated expenditure
$ 22,200,000.00
$ 16,200,000
Average
Interest Rate
Capitalized Interest
Average Accumulated expenditure
$ 1,100,000.00
8
%
=
$ 88,000.00
16,200,000-1,100,000
$ 15,100,000.00
7.75
%
=
$ 1,170,250.00
$ 1,258,250.00
Working Note:
Weighted -average rate of all other debt:
Loan Amount
x
Interest Rate
=
Interest Amount
Loan 1
$ 7,000,000.00
x
10
=
$ 700,000.00
Loan 2
$ 9,000,000.00
x
6
=
$ 540,000.00
Total Loan
$ 16,000,000.00
Total Interest Amount
$ 1,240,000.00
Average interest rate
1,240,000/16,000,000
7.75
Average Accumulated Expenditure
Date
Expenditure
Weight
Average
1-Jan
$ 7,000,000.00
x
12/12
=
$ 7,000,000
31-Mar
$ 8,000,000.00
x
9/12
=
$ 6,000,000
30-Jun
$ 6,000,000.00
x
6/12
=
$ 3,000,000
30-Oct
$ 1,200,000.00
x
2/12
=
$ 200,000
Accumulated expenditure
$ 22,200,000.00
$ 16,200,000
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