Question

herr inc. has a fiscal year ending april 30. on may 1, of the previous year, herr borrowed $10,000,000 at 15% to finance construction of its own building. repayments of the loan are to commence the month following completion of the building. during the current year ended april 30, expenditures for the partially completed structure totaled $6,000,000. these expenditures were incurred evenly throughout the year. interest earned on the unexpended portion of the loan amounted to $400,000 for the year. how much should be shown as capitalized interest on herr's financial statements at april 30?

Answer 1

The capitalized interest on Herr's financial statements at April 30 should be $102 million, calculated using the formula: Capitalized Interest = Interest Expense * (Weighted-Average Accumulated Expenditures / Total Expenditures).

Step-by-step explanation:

The capitalized interest on Herr's financial statements at April 30 should be $102 million.

To calculate the capitalized interest, we need to determine the weighted-average accumulated expenditures. As the expenditures were incurred evenly throughout the year, the weighted-average accumulated expenditures would be half of the total expenditures for the year, which is $3,000,000.

The formula to calculate capitalized interest is: Capitalized Interest = Interest Expense * (Weighted-Average Accumulated Expenditures / Total Expenditures)

In this case, the interest expense is $400,000 and the total expenditures are $6,000,000. Plugging these values into the formula, we get: Capitalized Interest = $400,000 * ($3,000,000 / $6,000,000) = $200,000.

Therefore, the amount to be shown as capitalized interest on Herr's financial statements at April 30 is $102 million ($200,000 + $10,000,000).