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, $660,000; March 31, $760,000; June 30, $560,000; October 30, $1,080,000. To help finance construction, the company arranged a 7% construction loan on January 1 for $1,020,000. The company’s other borrowings, outstanding for the whole year, consisted of a $2 million loan and a $4 million note with interest rates of 9% and 6%, respectively.

Answer 1

total capitalized interests = $118,300

Step-by-step explanation:

Weighted average expenditures:

January 1 = $660,000 x 12/12 = $660,000

March 31 = $760,000 x 9/12 = $570,000

June 30 = $560,000 x 6/12 = $280,000

October 30 = $1,080,000 x 2/12 = $180,000

total weighted expenditures = $1,690,000

weighted interest rate:

$2,000,000 x 9% = $180,000

$4,000,000 x 6% = $240,000

total = $420,000 / $6,000,000 = 7%

capitalized interest:

$1,020,000 x 7% = $71,400

($1,690,000 - $1,020,000) x 8.8% = $46,900

total capitalized interests = $118,300