Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2014, Peggy Fle

Question

Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2014, Peggy Fleming borrowed $10,269,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2015, expenditures for the partially completed structure totaled $7,188,300. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $667,485 for the year.

How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2015?

Explanation / Answer

Solution.

Loan Amount = $10,269,000

Rate of interest = 11%

Captilized Interest during year 2015.

= $7,188,300 x 110%       = $790,713

- Interest income on loan = $667,485

Net Interest expense         = $123,228

$123,228 should be captilized during 2015.

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