Interest During Construction Matrix Inc. borrowed $1,000,000 at 8% to finance th
ID: 2410058 • Letter: I
Question
Interest During Construction
Matrix Inc. borrowed $1,000,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2016, and was completed on October 31, 2016. Expenditures related to this building were:
In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.
Required:
Compute the amount of interest capitalized related to the construction of the building.
= $ 40,400
If the expenditures are assumed to have been incurred evenly throughout the year:
Compute weighted average accumulated expenditures
= $ 629,000
Compute the amount of interest capitalized on the building
$ __________
January 1 $252,000 (includes cost of purchasing land of $150,000) May 1 310,000 July 1 420,000 October 31 276,000Explanation / Answer
1) Compute the amount of interest capitalized related to the construction of the building
Solution:
Expenditures Portion Outstanding Weighted average
Jan-01 252,000 10/12 210,000
May-01 310,000 6/12 155,000
Jul-01 420,000 4/12 140,000
Oct-31 276,000 0/12 0
505,000 * 8 % = 40,400
Actual interest
1,000,000 8% 80,000
500,000 9% 45,000
800,000 10% 80,000
205,000
As avoidable interest is less than actual interest thus 40,400 will be capitalized
2) -- Compute weighted average accumulated expenditures: $ 629,000
Working: 1,258,000 / 2 = 629,000
-- Compute the amount of interest capitalized on the building: $50,320
Working: 629,000 * 0.08 = 50,320
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