On January 1, 2018, the Marjlee Company began construction of an office building

Question

On January 1, 2018, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2019. Construction expenditures for 2018, which were incurred evenly throughout the year, totaled $8,700,000. Marjlee had the following debt obligations which were outstanding during all of 2018:

Required:
Calculate the amount of interest capitalized in 2018 for the building using the specific interest method.

Construction loan, 9% $ 2,175,000 Long-term note, 8% 2,900,000 Long-term note, 5% 5,800,000

Explanation / Answer

Average expenditure during year = $8,700,000 / 2 = $4,350,000

Weighted average rate = [{($2,900,000 x 8%) + ($5,800,000 x 5%)} / {$2,900,000 + $5,800,000}]
= 6.00%

Interest capatilised = [($2,175,000 x 9%) + {($4,350,000 - $2,175,000 ) x 6%}]
= $326,250

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