On July 1, 2012, Bashful Co. contracts with Doc Co. to build Bashful\'s new fact

Question

On July 1, 2012, Bashful Co. contracts with Doc Co. to build Bashful's new factory. Doc began work immediately on the factory and continued working until the project's completion on December 31, 2013 Bashful's payments to Doc for the construction are presented below. Payment Date October 1,2012 January 1, 2013 March 1, 2013 July 1, 2013 October 1, 2013 Payment Amount $6,000,000 $4,000,000 $3,000,000 $2,000,000 S3,000,000 On January 1, 2013, Bashful borrowed $10,000,000 to help fund the factory construction costs. This deb incurs interest at 10% annually. Bashful paid this borrowing in full on June 30, 2013, Bashful hasno other debt outstanding r company that capitalizes interest when appropriate, compute th following amounts for 2013 Factory account at year-end Avoidable Interest Interest Incurred during Capitalization Period Interest Incurred Fiscal Year Interest Expense

Explanation / Answer

Determining the average accumulated expenditure.

($6,000,000 is the payment made before the loan was barrowed, hence weighted average loan amount needs to be calculated for remaining period in year 2012)

October 1, 2012                $6,000,000*3/12 = $1,500,000

Interest capitalized for 2012 = $1,500,000*10% = $150,000

Actual calculation loan rate $10,000,000*10% = $1,000,000

Whichever is lower needs to be used from above, $150,000 is low so Interest capitalization is $150,000

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