Question

On March 1, 2010, Newton Company purchased land for an office site by paying $540,000 cash. Newton began construction on the office building on March 1. The following expenditures were incurred for construction:

Date Expenditures
March 1, 2010 $ 360,000
April 1, 2010 504,000
May 1, 2010 900,000
June 1, 2010 1,440,000

The office was completed and ready for occupancy on July 1. To help pay for construction, $720,000 was borrowed on March 1, 2010 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2010 was a $300,000, 12%, 6-year note payable dated January 1, 2010.

The weighted-average accumulated expenditures on the construction project during 2010 were
a. $384,000.
b. $2,934,000.
c. $312,000.
d. $696,000.

The actual interest cost incurred during 2010 was
a. $90,000.
b. $100,800.
c. $50,400.
d. $84,000.

Assume the weighted-average accumulated expenditures for the construction project are $870,000. The amount of interest cost to be capitalized during 2010 is
a. $78,300.
b. $82,800.
c. $90,000.
d. $100,800.

Answer 1

To answer the student's question, calculations must be performed for weighted-average accumulated expenditures, actual interest incurred, and the interest cost to be capitalized using the provided expenditure data, interest rates, and loan amounts.

Step-by-step explanation:

The student's question relates to the calculation of weighted-average accumulated expenditures for a construction project and the determination of actual interest cost incurred and the interest cost to be capitalized during the year 2010. To calculate the weighted-average accumulated expenditures, we need to consider the timing and amount of each expenditure and calculate the average based on the length of time each amount was invested in the project. The actual interest cost is based on the interest rates and the amounts borrowed. To determine the interest cost to be capitalized, we will use the weighted-average accumulated expenditures and apply the appropriate interest rates.

The solution is as follows:

1. Calculate the amount of time each expenditure was invested in the construction during the year.
2. Multiply each expenditure by the period of time it was outstanding, sum these amounts, and divide by the total length of the construction to get the weighted-average accumulated expenditures.
3. Calculate the actual interest cost by applying the interest rates to the respective notes payable.
4. Determine how much of the interest cost can be capitalized using the calculated weighted-average accumulated expenditures and the interest rates.