Problem 10-7 Buffalo Inc. is a book distributor that had been operating in its o
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Question
Problem 10-7
Buffalo Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Buffalo since 2012. Buffalo’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Buffalo now carries CDs in addition to books.
On June 1, 2017, Buffalo contracted with Black Construction to have a new building constructed for $5,600,000 on land owned by Buffalo. The payments made by Buffalo to Black Construction are shown in the schedule below.
Date
Amount
$1,260,000
2,100,000
2,240,000
$5,600,000
Construction was completed and the building was ready for occupancy on May 27, 2018. Buffalo had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material
Compute the weighted-average accumulated expenditures on Buffalo’s new building during the capitalization period.
$
Compute the avoidable interest on Buffalo’s new building. (Round intermediate percentage calculation to 1 decimal place, e.g. 15.6% and final answer to 0 decimal places, e.g. 5,125.)
$
Some interest cost of Buffalo Inc. is capitalized for the year ended May 31, 2018. Compute the amount of each items that must be disclosed in Buffalo’s financial statements.
Date
Amount
July 30, 2017$1,260,000
January 30, 20182,100,000
May 30, 20182,240,000
Total payments$5,600,000
Explanation / Answer
a) Calculation of Weighted Average Accumulated Expenditures
b) For calculating avoidable interest, firstly we need to calculate weighted average interest rate which is shown as follows:-
Calculation of Weighted Average Interest Rate (Amounts in $)
Interest on note payable = $2,800,000*10% = $280,000
Interest on Bond = $4,200,000*12% = $504,000
Total Actual Interest = $280,000+$504,000 = $784,000
Weighted Average Interest Rate = Total Actual interest/Total loan outstanding
= $784,000/($2,800,000+$4,200,000) = $784,000/$7,000,000
= 0.112 or 11.2%
Avoidable Interest = Weighted Average Accumulated Expenditure*Weighted Average Interest Rate
= $1,750,000*11.2% = $196,000
c) Total Actual Interest Cost = $784,000
Total Interest Capitalized = Avoidable Interest = $196,000
Total Interest expensed = $784,000 - $196,000 = $588,000
July 30, 2017 (from August 2017 to May 2018) $1,260,000*10/12 1,050,000 January 30, 2018 (from Feb to May) $2,100,000*4/12 700,000 May 30, 2018 (0 months) $2,240,000*0/12 0 Weighted Average Accumulated Expenditure ($1,050,000+$700,000+$0) 1,750,000Related Questions
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