On June 1, 2015, the Crocus Company began construction of a new manufacturing pl

Question

On June 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2016. Expenditures on the project were as follows ($ in millions): July 1, 2015 54 October 1, 2015 22 February 1, 2016 30 April 1, 2016 21 September 1, 2016 20 October 1, 2016 6 On July 1, 2015, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2016. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2015 and 2016. The company's fiscal year-end is December 31. What is the amount of interest that Crocus should capitalize in 2016, using the specific interest method (rounded to the nearest thousand dollars)?

Explanation / Answer

Average expenditures for 2015: ($54 million × 6/6) + ($22 million × 3/6) = $65 million. The interest is: $65 million × .06 × 6/12 = $1.95 million.

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