Homework Problem #2 Early in 2014, Dobbs Corporation engaged Kiner, Inc. to desi
ID: 2505041 • Letter: H
Question
Homework Problem #2
Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2014 and was completed on December 31, 2014. Dobbs made the following payments to Kiner, Inc. during 2014:
Date Payment
June 1, 2014 $6,000,000
August 31, 2014 9,000,000
December 31, 2014 7,500,000
In order to help finance the construction, Dobbs issued the following during 2014:
1. $5,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2014, with interest payable annually on May 31.
2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2014.
In addition to the 9% bonds payable, the only debt outstanding during 2014 was a $1,250,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on January 1.
Instructions
Computer the amounts to each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalzation of interest cost.
2. Avoidbale interest incurred during 2014.
3. Total amount of interest cost to be capitalized during 2014/
Explanation / Answer
1. Weighted-Average
Capitalization Accumulated
Date Expenditures Period Expenditures
June 1 $6,000,000 7/12 $3,500,000
August 31 9,000,000 4/12 3,000,000
December 31 7,500,000 0 0
$6,500,000
2. Weighted-Average
Accumulated Appropriate Avoidable
Expenditures Interest Rate Interest
$5,000,000 .09 $450,000
900,000 .12 108,000
$3,900,000 $558,000
3. Actual interest incurred during 2014:
9% bonds payable, $5,000,000
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