Question

On January 1, 2021, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The only interest-bearing debt the company had outstanding during 2021 was long-term bonds with a book value of $10,000,000 and an effective interest rate of 8%. Construction expenditures incurred during 2021 were as follows:

January 1 ...............$ 500,000
March 1 ....................600,000
July 31 ......................480,000
September 30 .........600,000
December 31 ..........300,000
Required:
Calculate the amount of interest capitalized for 2021.

Answer 1

Shagri Company

The Amount of Interest Capitalized for 2021 is:

= $108,000

Step-by-step explanation:

a) Data and Calculations:

Outstanding interest-bearing long-term bonds = $10 million

Effective interest rate = 8%

Construction Expenditures incurred during 2021:

Date Amount incurred Weight Weighted-Average

Expenditure

January 1 $ 500,000 12/12 $500,000

March 1 600,000 10/12 500,000

July 31 480,000 5/12 200,000

September 30 600,000 3/12 150,000

December 31 300,000 0/12 0

Total Weighted-Average Cumulative Expenditure $1,350,000

Amount of interest capitalized for 2021 = $108,000 ($1,350,000 * 8%)