Question

At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition

Answer 1

$72,500

Step-by-step explanation:

The computation of the amount of interest capitalized is as follows:

= ($500,000 × 12%) + ($625,000 - $500,000) × 10%

= $60,000 + $12,500

= $72,500

The Average expenditure for the year is

= ($200,000 × 12 ÷ 12) + ($600,000 × 8 ÷ 12) + ($300,000 × 1 ÷ 12)

= $200,000 + $400,000 + $25,000

= $625,000