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, $530,000; March 31, $630,000; June 30, $430,000; October 30, $690,000. To help finance construction, the company arranged a 10% construction loan on January 1 for $760,000. 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 13% and 6%, respectively.

Required:
Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year.

Answer 1

total capitalized interests = $126,380

Step-by-step explanation:

Weighted average expenditures:

January 1 = $530,000 x 12/12 = $530,000

March 31 = $630,000 x 9/12 = $472,500

June 30 = $430,000 x 6/12 = $215,000

October 30 = $690,000 x 2/12 = $115,000

total weighted expenditures = $1,332,500

weighted interest rate:

$4,000,000 x 13% = $520,000

$6,000,000 x 6% = $360,000

total = $880,000 / $10,000,000 = 8.8%

capitalized interest:

$760,000 x 10% = $76,000

($1,332,500 - $760,000) x 8.8% = $50,380

total capitalized interests = $126,380