On January 2, 2011, the Highlands Company began construction on a new manufactur
ID: 2409431 • Letter: O
Question
On January 2, 2011, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2012. The company borrowed $1,500,000 at 8% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2011:
$5,000,000, 12% bonds
$3,000,000, 8% long-term note
Construction expenditures incurred during 2011 were as follows:
January 1 $ 600,000
March 31 1,200,000
June 30 800,000
September 30 600,000
December 31 400,000
Assume that the company has no other interest-bearing debts, the amount of interest expense that will appear in the 2011 income statement is
A. $177,750.
B. $840,000.
C. $960,000.
D. $782,250.
Explanation / Answer
Answer
A ) 177750
1 jan 600000 * 12 / 12 = 600000 31 mar 1200000 * 9 / 12 = 900000 30 jun 800000 * 6 / 12 = 400000 30 sep 600000 * 3 / 12 = 150000 31 dec 400000 * 0 / 12 = expenditure 3600000 2050000
specific debit = 1500000 * 8 % = 120000 general debit = 550000 * 10.5 % = 57750 177750
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