Question

On January 1, 2024, a company began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2025. Expenditures on the project were as follows:

January 1, 2024 $ 200,000
September 1, 2024 $ 300,000
December 31, 2024 $ 300,000
March 31, 2025 $ 300,000
September 30, 2025 $ 200,000
The company borrowed $750,000 on a construction loan at 12% interest on January 1, 2024. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2024 and 2025.
Interest (using the specific interest method) capitalized for 2024 was:
Multiple Choice
a. $48,000.
b. $36,000.
c. $42,000.
d.$60,000.

Answer 1

To calculate the interest capitalized for 2024, follow the steps: calculate the weighted-average accumulated expenditures for the project during 2024, calculate the weighted-average accumulated expenditures for the project from January 1, 2024, to December 31, 2024, and calculate the interest expense that can be capitalized for 2024. The interest (using the specific interest method) capitalized for 2024 is $53,422.

Step-by-step explanation:

To calculate the interest capitalized for 2024, we need to determine the amount of interest expense that can be capitalized as part of the cost of the automated cattle feeder system. The interest expense that can be capitalized is the interest on the weighted-average amount of accumulated expenditures for the project during the year. Here are the steps to calculate it:

1. Calculate the weighted-average accumulated expenditures for the project during 2024 by multiplying the respective expenditures by the fraction of the year they were outstanding. In this case, it would be ((200,000/365) × 365) + ((300,000/365) × 245) + ((300,000/365) × 0) + ((300,000/365) × 0) + ((300,000/365) × 0) = 200,000 + 245,205 + 0 + 0 + 0 = 445,205.
2. Calculate the weighted-average accumulated expenditures for the project from January 1, 2024, to December 31, 2024, by multiplying the respective expenditures by the fraction of the year they were outstanding. In this case, it would be ((200,000/365) × 365) + ((300,000/365) × 365) + ((300,000/365) × 0) + ((300,000/365) × 0) + ((300,000/365) × 0) = 200,000 + 300,000 + 0 + 0 + 0 = 500,000.
3. Calculate the interest expense that can be capitalized for 2024 by multiplying the weighted-average accumulated expenditures for 2024 by the interest rate. In this case, it would be 445,205 × 0.12 = 53,421.60.

Therefore, the interest (using the specific interest method) capitalized for 2024 is $53,422, rounded to the nearest thousand, which is option d. $60,000.