On December 31, 2016, Marin Inc. borrowed $3,900,000 at 12% payable annually to
ID: 2578261 • Letter: O
Question
On December 31, 2016, Marin Inc. borrowed $3,900,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $468,000; June 1, $780,000; July 1, $1,950,000; December 1, $1,950,000. The building was completed in February 2018. Additional information is provided as follows. 1. Other debt outstanding 10-year, 13% bond, December 31, 2010, interest payable annually $5,200,000 6-year, 10% note, dated December 31, 2014, interest payable annually $2,080,000 2. March 1, 2017, expenditure included land costs of $195,000 3. Interest revenue earned in 2017 $63,700 Collapse question part (a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building. The amount of interest $
Explanation / Answer
Step 1 - Calculation of weighted average accumulated expenditure
Date
Amount spent
Capitalization period
Weighted average accumulated expenditures
March 01, 2016
$ 4,68,000.00
10
$ 3,90,000.00
June 01, 2016
$ 7,80,000.00
7
$ 4,55,000.00
July 01, 2016
$ 19,50,000.00
6
$ 9,75,000.00
December 01, 2016
$ 19,50,000.00
1
$ 1,62,500.00
$ 19,82,500.00
Interest on weighted average = $1,982,500*12%
WAAE
$237,900.00 =
Avoidable interest
Step 2 - Calculation of Actual interest
$ 52,00,000.00
13.00%
$ 6,76,000.00
$ 20,80,000.00
6.00%
$ 1,24,800.00
$ 39,00,000.00
12.00%
$ 4,68,000.00
Actual interest $12,68,800.00
As per GAAP whichever is least can be capitalized amount 'Actual Interest' and 'Avoidable interest', Hence amount of interest to be capitalized in 2017 in relation to the construction of the building $237,900.00
Date
Amount spent
Capitalization period
Weighted average accumulated expenditures
March 01, 2016
$ 4,68,000.00
10
$ 3,90,000.00
June 01, 2016
$ 7,80,000.00
7
$ 4,55,000.00
July 01, 2016
$ 19,50,000.00
6
$ 9,75,000.00
December 01, 2016
$ 19,50,000.00
1
$ 1,62,500.00
$ 19,82,500.00
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