Question

During year 8, Clark Company manufactured equipment for its own use at a total cost of $2,400,000. The project required the entire year to complete and all costs were incurred uniformly throughout the year. At the beginning of the period, Clark was able to borrow $1,500,000 at 6% specifically for the purchase of materials and the manufacture of the equipment. The entire debt, with interest was repaid on December 31, year 8, replaced with a long-term loan. Throughout year 8, Clark Company had additional debt of $1,000,000 with a weighted average interest rate of 7%. If Clark Company capitalizes the maximum amount of interest allowable under GAAP, how much will Clark report as interest expense in year 8

Answer 1

$88,000

Step-by-step explanation:

Calculation to determine how much will Clark report as interest expense in year 8

First step is to calculate the total interest expense for the year

Total interest expense = ($1,500,000 x 6%) + ($1,000,000 x 7%)

Total interest expense = $90,000 + $70,000

Total interest expense=$160,000

Second step is to calculate the weighted average costs

Weighted average costs = $2,400,000 / 2

Weighted average costs= $1,200,000

Third step is to calculate the capitalize interests

Capitalize interests =$1,200,000 x 6%

Capitalize interests= $72,000

Now let calculate the interest expense in year 8 using this formula

Year 8 Interest expense=Total interests - Capitalized interests

Let plug in the formula

Year 8 Interest expense= $160,000 - $72,000

Year 8 Interest expense= $88,000

Therefore The amount that Clark will report as interest expense in year 8 is $88,000