Hawkins Corporation began construction of a motel on March 31, 2018. The project

Question

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 30, 2019. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period: $6,000,000, 6% note $6,800,000, 10% bonds Construction expenditures incurred were as follows: March 31, 2018 June 30, 2018 November 30, 2018 February 28, 2019 $3,100,000 5,100,000 1,620,000 2,100,000 The company's fiscal year-end is December 31 Required: Calculate the amount of interest capitalized for 2018 and 2019. (Round weighted average interest rate to 2 decimal places and final answers to the nearest whole dollar) 2018 2019 Amount of interest

Explanation / Answer

Solution: 2018 2019 Amount of interest 543,084 927,884 Working Notes: Amount to interest capitalized for 2018 & 2019 1st 2018 Average accumulated expenditures for 2018: calculation Amount March 31, 2018 $3,100,000 x 9/9 $3,100,000 June 30, 2018 $5,100,000 x 6/9 $3,400,000 November 30, 2018 $1,620,000 x 1/9 $180,000 Average accumulated expenditures for 2018 $6,680,000 Amount to interest capitalized for 2018 = Average accumulated expenditures for 2018 x Weighted-average rate of all debt Calculation of Weighted-average rate of all debt Annual interest $6,000,000 6% Note =6,000,000 x 6% 360,000 $6,800,000 10% bond =6,800,000 x 10% 680,000 Total debt $12,800,000 Total interest 1,040,000 Weighted-average rate of all debt '= Total interest / Total debt =1,040,000/12,800,000 =0.08125 =8.125% =8.13% Amount to interest capitalized for 2018 = Average accumulated expenditures for 2018 x Weighted-average rate of all debt =$6,680,000 x 8.13 % =$543,084 Now for 2019 Average accumulated expenditures for 2019: calculation Amount January 1, 2019 ($9,820,000 2018 exp. + 543,084 interest cap. 2018) $10,363,084 x 4/4 $10,363,084 Feb. 28, 2019 $2,100,000 x 2/4 $1,050,000 Average accumulated expenditures for 2019: $11,413,084 Amount to interest capitalized for 2019 = Average accumulated expenditures for 2019 x Weighted-average rate of all debt =$11,413,084 x 8.13% =$927,883.7292 =$927,884 Please feel free to ask if anything about above solution in comment section of the question.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.