Accounting in acquisition and disposition of property, plant and Equipment 7. ON

Question

Accounting in acquisition and disposition of property, plant and Equipment

7. ON JANUARY 1, 2018, HUSKER COMPANY SIGNED A CONTRACT FOR $12,000,000 TO HAVE A NEW OUTLET STORE BUILT FOR ITS OWN USE. IT WILL TAKE 2 YEARS TO BUILD THE STORE. ON THE SAME DAY, HUSKER COMPANY BORROWED $1,200,000 WITH A 3-YEAR CONSTRUCTION LOAN. THE LOAN HAS AN 8% INTEREST RATE, ALSO, ON JANUARY 1, A $3,000,000 PAYMENT WAS MADE TO THE CONSTRUCTION COMPANY WHICH HAD ALREADY BEGUN WORK ON THE NEW OUTLET STORE. ON NOVEMBER 15T, 2018 A SECOND PAYMENT OF $2,400,000 WAS MADE TO THE CONSTRUCTION COMPANY. IN ADDITION TO THE CONSTRUCTION LOAN, HUSKER HAD A LOAN FOR $4,000,000, 6% INTEREST RATE. THAT HAD BEEN OUTSTANDING SINCE AUGUST OF 2016 AND WAS DUE IN AUGUST OF 2021. COMPUTE THE INTEREST TO BE CAPITALIZED FOR THE YEAR- ENDED DECEMBER 315T, 2018.

Explanation / Answer

Interest to be capitalized for the construction contract for the year ended Dec 31, 2018 =

Period Payment amount $ Interest % interest capitalised $ Jan1 18 - dec 31 18 1.2m construction loan 8 (12 months) $96000 Jan1 18 - dec 31 18 1.8m General loan 6(12 months) $108000 Nov 1 18 - dec 31 18 2.4m General loan 6(2 months) $24000 Interest to be capitalised $228,000

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