Question

On January 1, 2017, Plaid Corporation begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Plaid had the following expenditures on the project during 2017:

January 1, 2017
$200,000
July 1, 2017
$600,000
December 1, 2017
$120,000

What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017?
1) $420,000
2) $310,000
3) $510,000
4) $460,000

Answer 1

The average accumulated expenditures for capitalized interest on the new warehouse construction project by Plaid Corporation in 2017 is $510,000, calculated by taking a weighted average of the expenditures based on the time they were outstanding during the year.

Step-by-step explanation:

To calculate the average accumulated expenditures for capitalized interest on the construction project in 2017, we must consider the amounts spent and the timing of these expenditures. Plaid Corporation made three payments towards the construction of the warehouse: $200,000 on January 1, $600,000 on July 1, and $120,000 on December 1.

Here's how to calculate the average:

• The $200,000 spent on January 1st counts for the full year.
• The $600,000 spent on July 1st counts for 6 months (July-December).
• The $120,000 spent on December 1st is only for one month.

We calculate a weighted average by multiplying each expenditure by the proportion of the year it was outstanding, sum these amounts, and then divide by the total weight.

January 1 expenditure: $200,000 × 12/12 = $200,000
July 1 expenditure: $600,000 × 6/12 = $300,000
December 1 expenditure: $120,000 × 1/12 = $10,000

The total weighted expenditure is $200,000 + $300,000 + $10,000 = $510,000.

The average accumulated expenditures for 2017 is therefore $510,000.