On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Bui

Question

On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,460,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2014, to finance the construction cost, Oksana Baiul borrowed $4,460,000 payable in 10 annual installments of $446,000, plus interest at the rate of 10%. During 2014, Oksana Baiul made deposit and progress payments totaling $1,672,500 under the contract; the weighted-average amount of accumulated expenditures was $891,999 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $254,000.

What amount should Oksana Baiul report as capitalized interest at December 31, 2014

Explanation / Answer

The amount that should be capitalised is the amount taken to construct the plant Total Amount borrowed $4,460,000 Total Amount for the contract Under Contract $1,672,500 Expenditure $891,999 Total (1672500+891999) 2564499 Interest @ 10% 2564499*10% 256449.9 Interest of $ 256450 should be capitalised on 31st December,2014 The Income from investments in short term securities should be taxed separately

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