Early in 2013, Dobbs Corporation engaged Kiner, Inc. to design and construct a c

Question

Early in 2013, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2013 and was completed on December 31, 2013. Dobbs made the following payments to Kiner, Inc. during 2013: Date Payment June 1, 2013 $3,600,000 August 31, 2013 5,400,000 December 31, 2013 4,500,000 During 2013, in order to help finance the construction, Dobbs issued $3,000,000 of 10–year, 9% bonds payable, issued at par on May 31, 2013, with interest payable annually on May 31. In addition to the 9% bonds payable, the only debt outstanding during 2013 was a $750,000, 12% note payable dated January 1, 2009 and due January 1, 2019, with interest payable annually on January 1. Instructions:Compute the amounts of each of the following. Show and label all calculations. Weighted–average accumulated expenditures qualifying for capitalization of interest cost. Avoidable interest incurred during 2013. Total amount of interest cost to be capitalized during 2013

Explanation / Answer

Answer :

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Following schedule calculates the weighted-average accumulated expenditures: Payment Date Expenditures
(A) Capitalization Period (Month)
(B) Weight
(C=B/12) Weighted Expenditures
(A×C) '01-06-2013 3600000 9 0.75 2700000 '31-08-2013 5400000 4 0.33 1800000 '31-12-2013 4500000 0 0 0 ------------------- Total 4500000 Calculation of avoidable interest Funding Amount Rate Avoidable Interest Specific Loan 3000000 9.00% 270000 General Pool 750000 12.00% 90000 '------------------ Total 360000 '------------------ Avoidable interest for 2013 Total Interest /12*7 Avoidable interest for 2013 210000 Interest should be capitalized 210000

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