The following three situations involve the capitalization of interest. Situation
ID: 2609963 • Letter: T
Question
The following three situations involve the capitalization of interest.
Situation I
On January 1, 2017, Grouper, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,323,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Grouper borrowed $4,323,000 payable in 10 annual installments of $432,300, plus interest at the rate of 10%. During 2017, Grouper made deposit and progress payments totaling $1,621,125 under the contract; the weighted-average amount of accumulated expenditures was $864,600 for the year. The excess borrowed funds were invested in short-term securities, from which Grouper realized investment income of $252,200.
What amount should Grouper report as capitalized interest at December 31, 2017?
Capitalized interest?
Situation II
During 2017, Monty Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Interest Costs Incurred
The total amount of interest costs to be capitalized?
Situation III
Flounder, Inc. has a fiscal year ending April 30. On May 1, 2017, Flounder borrowed $9,188,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled $6,431,600. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $597,220 for the year.
How much should be shown as capitalized interest on Flounder’s financial statements at April 30, 2018?
Capitalized interest?
Situation II
During 2017, Monty Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Interest Costs Incurred
Warehouse constructed for Monty’s own use $33,960 Special-order machine for sale to unrelated customer, produced accordingto customer’s specifications 9,250 Inventories routinely manufactured, produced on a repetitive basis 8,020
All of these assets required an extended period of time for completion.
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
The total amount of interest costs to be capitalized?
Situation III
Flounder, Inc. has a fiscal year ending April 30. On May 1, 2017, Flounder borrowed $9,188,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled $6,431,600. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $597,220 for the year.
How much should be shown as capitalized interest on Flounder’s financial statements at April 30, 2018?
Explanation / Answer
Situation-1 Amount to be capitalized= Lower of avoidable interest or Actual interest Avoidable interest =Weighted average accumulated expenditure*interest rate=864600*10%=86460 Actual interest=$ 4323000*10%=432300 Amount to be capitalized= Lower of 86460 or 432300=$ 86460 As Per FASB statement no.62, interest earned on the unexpended portion of loan cant be adjusted against the interest to be capitalized. Situation-II As per FASB statement no.34, Assets qualifies for interest capitalization includes Asset constructed for an organization's own use Asset produced according to customer specification Interest to be capitalized=33960+9250=$ 43210 Situation-III Amount to be capitalized= Lower of avoidable interest or Actual interest Avoidable interest =Weighted average accumulated expenditure*interest rate Weighted average accumulated expenditure=6431600/2=3215800 Avoidable interest =3215800*11%=353738 Actual interest=9188000*11%=1010680 Amount to be capitalized= Lower of 353738 or 1010680=$ 353738 As Per FASB statement no.62, interest earned on the unexpended portion of loan cant be adjusted against the interest to be capitalized.
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