Final answer:
Falwell Company should capitalize $250,000 in interest for the year 2024, which is the actual interest incurred from their construction loan. Option b is the correct answer.
Step-by-step explanation:
In January of 2024, the Falwell Company began construction of its own manufacturing facility and spent $6,000,000 in costs incurred throughout the year. The company also took out a $2,500,000, 10% construction loan at the beginning of the year and had no other interest-bearing debt. To calculate the amount of interest Falwell should capitalize in 2024, we need to apply the capitalization rules according to the Interest Capitalization component of GAAP (Generally Accepted Accounting Principles).
The capitalization of interest is determined using the specific borrowings and the weighted-average accumulated expenditures for the assets constructed. For Falwell Company’s case:
The annual interest on the loan is 10% of $2,500,000 which equals $250,000.
Since there are no other interest-bearing debts, the interest to be capitalized must not exceed the actual interest incurred.
Therefore, the correct option for the amount of interest Falwell should capitalize for the year 2024 is $250,000, which is the actual interest incurred on the construction loan.