WK 10 & 11 Homework Help Save & Exit Submit Saved Check my work 4 On January 1,

Question

WK 10 & 11 Homework Help Save & Exit Submit Saved Check my work 4 On January 1, 2018, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2019. Construction expenditures for 2018, which were incurred evenly throughout the year, totaled $6,000,000. Marjlee had the following debt obligations which were outstanding during all of 2018 10 polnts Construction loan, Long-term note, 9% Long-term note, 6% $1,500,000 2,000,000 4,000,000 10% eBook Required Calculate the amount of interest capitalized in 2018 for the building using the specific interest method Hint Interest capitalized Print References Mc Graw Prev 4of 7 Next >

Explanation / Answer

The below is the explanation:

First let us calculate the average expenditure on construction during 2018.

=> $6,000,000 / 2 =>$3,000,000 .....(since the expenditure was incurred evenly all through the year, we need to divide by two).

average interest rate on general borrowings (the two long term notes).

average interest rate = total interst / total borrowings

=>$420,000 / $6,000,000

=>0.07

=>7%.

now,

interest capitalised.

Whole of interest on specific borrowing will be capitalised.

here, construction loan @10% is a specific borrowing.

the amount of general borrowing (average expenditure - specific borrowing ) is charged at average interest rate

=>($3,000,000 - $1,500,000) =>$1,500,000 is charged @7%.

the following is the table showing calculation:

interest capitalised $255,000

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