17. During 2017, Bass Corporation constructed assets costing $4,000,000. The wei
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17. During 2017, Bass Corporation constructed assets costing $4,000,000. The weighted-average accumulated expenditures on these assets during 2017 was $2,400,000. To help pay for construction, $1,760,000 was borrowed at 10% on January 1,2017, and funds not needed for construction were temporarily invested in short-term securities, yielding $36,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $2,000,000, 10-year 9% note payable dated January 1, 2011 . What is the amount of interest that should be capitalized by Bass during 2017?Explanation / Answer
As per the Accounting Standards, all the borrowing costs incurred during the year specifically for the construction of qualifying asset should be added to the cost of the asset. And all other borrowing costs which are incurred specifically for the construction of a paticular asset should be capitalized to the cost of qualifying asset on the basis of a capitalization rate.
Capital Expediture incurred during 2017 = $2,400,000
Funds borrowed during 2017 specifically for the construction of qualifying asset = $1,760,000
Borrowing cost incurred specifically for constrcution of qualifying asset = 1,760,000 x 10% x 1 year.
= $176,000
Interest income generated on funds not needed = $36,000
Borrowing cost to be capitalized = $176,000 - $36,000 = $140,000.
Borrowing Cost incurred on funds not specifically taken for the construction of Asset = $2,000,000 x 9% x 1 year
= $180,000.
However out of the total expenses ($2,400,000) incurred during the year on construction of asset, $1,760,000 is allocated out of funds specifically taken for construction and therefore, interest expense on general funds will be capitalized on the basis of remaining $2,400,000 - $1,760,000 = $640,000
Borrowing cost to be capitalized from general funds = $180,000 / 2,000,000 x 640,000 = $57,600
As a result total borrowing cost to be capitalized during the year = $140,000 + $57,600 = 197,600
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