Use the following information for Questions 1-2 ACL Co. manufactures and sells s

Question

Use the following information for Questions 1-2 ACL Co. manufactures and sells sporting equipment to athletes. At the beginning of 20x1, ACL Corp decides to build a new, larger office building to house its growing sales workforce. The construction of the building began on January 1, 20X1 and ended on September 30, 20x1. During 20x1, ACL Corp. incurs the following costs relating to the construction of the building: January 1, 20x1 Architect fees for the building design February 1, 20x1 Purchased construction materials for building April 1, 20x1 Paid building construction workers 50,000 1,000,000 750,000 Paid building workers Purchased construction materials for the building 650,000 500,000 August 1, 20x1 ACL Corp. has a $500,000 construction loan for the building at 10%. ACL Corp has two other loans. One loan is for $1,500,000 at 3% and the other loan is for $500,000 at 8%. All three loans were outstanding throughout all of 20X1.

Explanation / Answer

Calculation of Average Accululated Expenditure: 1-Jan                    50,000 9/9               50,000 1-Feb              1,000,000 8/9            888,889 1-Apr                  750,000 6/9            500,000 1-Aug              1,150,000 2/9            255,556 Total Accumulated Expenditure         1,694,444 Calculation of Average Interest Rate: Amount Int. Rate Interest Loan 1              1,500,000 3% 45000 Loan 2                  500,000 8% 40000              2,000,000               85,000 Average Interest Rate = $85,000 / $2,000,000 Average Interest Rate = 4.25% Interest Capitalization = ($500,000 X 10%) X 9/12 + ($1,694,444 - $500,000) X 4.25% X 9/12 Interest Capitalization = $37,500 + $38,073 Interest Capitalization = $75,573

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