Sylvester Co. takes out a 12% loan of $500,000 on 1/1/2014 to finance constructi

Question

Sylvester Co. takes out a 12% loan of $500,000 on 1/1/2014 to finance construction of a building for the company’s own use. Construction begins immediately, and $600,000 is spent on the construction at an even pace during 2014. Another $400,000 is spent at an even pace during 2015, with construction completed on 12/31/2015. No other construction loans are taken out. Sylvester incurred unrelated interest expenses of $10,000 and $15,000 in 2014 and 2015, respectively, on loans that bear interest at 10%. How much interest can Sylvester capitalize in 2014 and 2015? 2014 2015 a. $ 60,000 $ 96,000 b. $ 36,900 $ 96,000 c. $ 60,000 $ 60,000 d. $ 36,000 $ 75,000

Explanation / Answer

d. $ 36,000 $ 75,000

Explanation:-

2014 Weighted avergae expenditure = $600000*0.5 = $300,000 Interest to be capitalise = $300,000*12% = $36,000 2015 Weighted avergae expenditure = $600000+ ($400,000*0.5)= $800,000 Interest to be capitalise Interest on loan = $500,000*12% = $60,000 Add: unrealted 300000*10%*0.5 =$15,000 Total interest = $75,000

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