Question

On January 1, 2025, Grouper, Inc. signed a fixed-price contract to have Homeward Construction construct a major plant facility at a cost of $8,200,000. It was estimated that it would take 2 years to complete the project. Also on January 1,2025 , to finance the construction cost, Grouper borrowed $8,200,000 payable in 8 annual installments of $1,025,000, plus interest at the rate of 8%. During 2025, Grouper made deposit and progress payments totaling $3,075,000 under the contract; the weighted-average amount of accumulated expenditures was $1,230,000 for the year. The excess borrowed funds were invested in short-term securities, from which Grouper realized investment income of $176,000. What amount should Grouper report as capitalized interest at December 31, 2025? Capitalized interest $ eTextbook and Media Attempts: 0 of 3 used (b) The parts of this question must be completed in order. This part will be available when you complete the part above. (c) The parts of this question must be completed in order. This part will be available when you complete the part above.

Answer 1

The amount of capitalized interest for Grouper, Inc. at December 31, 2025, is $98,400. This is because it is the lesser amount between the actual interest expense after considering investment income and the avoidable interest calculated based on the weighted-average accumulated expenditures.

Step-by-step explanation:

The student is asking to calculate the amount of capitalized interest for Grouper, Inc. at December 31, 2025, based on their investment and financing activities related to a new plant facility construction. To find the capitalized interest, we must apply the specific accounting guidance for interest capitalization which states that you should capitalize the actual interest cost incurred during the period to the extent that it is less than or equal to the avoidable interest.

The avoidable interest is the amount of interest cost Grouper, Inc. could theoretically avoid if it had not made expenditures for the asset. The avoidable interest is calculated based on the weighted-average amount of accumulated expenditures ($1,230,000) multiplied by the interest rate (8%). This gives us 0.08 * $1,230,000 = $98,400.

The actual interest expense for the loan is $8,200,000 * 0.08 = $656,000. However, Grouper has earned investment income of $176,000 from the excess borrowed funds, which effectively reduces the interest cost that can be capitalized. Hence, the capitalized interest would be $98,400 because it is the lesser amount between the actual interest expense minus the investment income ($656,000 - $176,000 = $480,000) and the avoidable interest ($98,400).