On January 1, 2016 the Shadow Company began construction on a new building for i

Question

On January 1, 2016 the Shadow Company began construction on a new building for its own use. The building was completed December 31, 2016. The Company borrowed $1,200,000 at 9% on January 1, 2016 to help finance construction. In addition to this construction loan, Shadow has the following debt outstanding during the entire year of 2016. $4,000,000 12% bonds $3,000,000 8% bonds

Construction expenditures for the year 2016 are as follows:

January 1 $600,000

March 1 $1,500,000

July 1 $1,200,000

November 1 $1,200,000

Required:

Caluculate the amount of interest capitalized for the construction of the building. Show all work to determine the capitalized interest.

Explanation / Answer

Interest to be capitalised = loan utilised*Average rate of intt*period for which loan is used/period of construction Expenditure incurred Interest to be capitalised January Specific Borrowing : $600000 54000 [$600000*9%*12/12] March Specific Borrowing : $600000 54000 [$600000*9%*12/12] General Borrowing : $900000 77175 [900000*10.29%*10m/12m] July General Borrowing : $1200000 61740 [1200000*10.29%*6m/12m] November General Borrowing : $1200000 20580 [1200000*10.29%*2m/12m] 267495 Rate of Intt for general Borrowing = Interest Cost/Total borrowing otstanding =$4000000*12%+$3000000*8%/($4000000+$3000000)         10.29 %

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