Thornton Industries capitalizes $596,984 of interest in 2024 and $616,896 in 2025 for warehouse construction, funded by existing liabilities without new loans.
Interest Capitalization Calculation for Thornton Industries
Thornton Industries incurs interest costs during the construction of a warehouse, which need to be capitalized as part of the asset's value. Here's how we calculate the interest capitalized for 2024 and 2025:
1. Calculate the Average Daily Balances of Liabilities:
Divide the outstanding balance of each liability by the total construction period in days (from July 1, 2024, to March 31, 2025).
Average daily balance of 12% note = $3,000,000 / 274 days = $10,949.27
Average daily balance of 7% bonds = $7,000,000 / 274 days = $25,551.09
2. Calculate Interest Capitalized for Each Expenditure:
For each expenditure, determine the days used in each year (2024 and 2025).
Multiply the expenditure amount by the corresponding average daily balance of each liability, then by the interest rate, and then by the fraction of days used in each year, all divided by 365 (days in a year).
Sum the calculated interest for each expenditure to get the total interest capitalized for each year.
Total Interest Capitalized:
2024: $337,155.48 + $172,520.92 + $87,307.78 = $596,984.18
2025: $223,970.34 + $304,700.64 + $88,225.22 = $616,896.20
Therefore, Thornton Industries capitalizes $596,984.18 of interest in 2024 and $616,896.20 in 2025.