Intermediate Accounting II (Capitalization of Interest Ch.10) Early in 2012, Dob

Question

Intermediate Accounting II (Capitalization of Interest Ch.10) Early in 2012, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobb's manufacturing facility. Construction was begun on June 1, 2012 and was completed on December 21, 2012. Dobbs made the following payments to Kiner, Inc. during 2012 Date Payment June 1, 2012 4,800,000 August 31, 2012 7,200,000 December 31, 2012 6,000,000 In order to help finance the construction, Dobbs issued the following during 2012: 1. 4,000,000 of 10 year, 9% bonds payable, issued at par on May 31, 2012 with interest payable annually on May 31. 2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2012. In addition to the 9% bonds payable the only debt outstanding during 2012 was a 1,000,000, 12% note payable dated January 1, 2008 and due January 1, 2018, with interest payable annually on January 1. Instructions: Compute the amounts of each of the following (show computations) 1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost. 2. Avoidable interest incurred during 2012. 3. Total amount of interest cost to be capitalized during 2012.

Explanation / Answer

1. Weighted-average for the project was 5.2 mil

2. Company borrowed 4.0 mil at 9% on May 31, which is less than the weighted avg expenditure.

Avoidable interest then was 210,000

3. Company also had 1.0 mil outstanding all year at 12%,or 70,000 during the 7 month construction period. Maximum interest that could be capitalized is 280,000.

Since the weighted avg for the project was more than the total borrowed during the period of construction, 280,000 is also the interest to be capitalized.

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