Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $2,050,000 at 11% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021:$6,000,000, 16% bonds$4,000,000, 11% long-term note Construction expenditures incurred during 2021 were as follows:January 1 $ 840,000March 31 1,440,000June 30 1,088,000September 30 840,000December 31 640,000Required:Calculate the amount of interest capitalized for 2021 using the specific interest method. (Do not round the intermediate calculations. Round your percentage answers to 1 decimal place (i.e. 0.123 should be entered as 12.3%).)

Answer 1

Highlands Company

The interest capitalized is:

= $294,140.

Step-by-step explanation:

a) Data and Calculations:

Borrowings on January 1 = $2,050,000 at 11%

Debt outstanding throughout 2021:

16% bonds = $6,000,000

11% long-term note = $4,000,000

Construction expenditures:

January 1 $ 840,000

March 31 1,440,000

June 30 1,088,000

September 30 840,000

December 31 640,000

Date Expenditure Weights Weighted-Average

January 1 $ 840,000 12/12 $840,000

March 31 1,440,000 9/12 1,080,000

June 30 1,088,000 6/12 544,000

September 30 840,000 3/12 210,000

December 31 640,000 0/12 0

Accumulated weighted-average expenditure = $2,674,000

Interest capitalized for 2021, using the specific interest method = $ ($2,674,000 * 11%)

= $294,140