Question

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows:

January 1, $590,000;
March 31, $690,000;
June 30, $490,000;
October 30, $870,000.

To help finance construction, the company arranged an 8% construction loan on January 1 for $880,000. The company’s other borrowings, outstanding for the whole year, consisted of a $4 million loan and a $6 million note with interest rates of 12% and 7%, respectively.
Assuming the company uses the weighted-average method, calculate the amount of interest capitalized for the year.

Answer 1

Total interest capitalized $125975

Step-by-step explanation:

Date Expenditure Weight Average

1-Jan $590,000 12/12 $590,000

31-Mar 690000 9/12 $517,500

30-Jun 490000 6/12 $245,000

30-Oct 870000 2/12 $145,000

Accumulated expenditures $2,640,000 $1,497,500

Average Interest Rate Capitalized Interest

Average accumulated expenditures $1,497,500

880000 8% 70400

$617,500 9% 55575

Total interest capitalized 125975

Average interest rate

Principal Interest rate Interest

Loan 1 4000000 12% 480000

Loan 2 6000000 7% 420000

10000000 900000

Average int rate=900000/10000000*100 9