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Question 1 Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2014 and was completed on December 31, 2014. Dobbs made the following payments to Kiner, Inc. during 2014:

Date Payment

1-Jun-14 $5,796,000

31-Aug-14 9240000

31-Dec-14 7,464,000

In order to help finance the construction, Dobbs issued the following during 2014:

1. $5,120,000 of 10-year, 9% bonds payable, issued at par on May 31, 2014, 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, 2014 I

n addition to the 9% bonds payable, the only debt outstanding during 2014 was a $1,284,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on January 1.

Compute the amounts of each of the following

1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.

2. Avoidable interest incurred during 2014.

3. Total amount of interest cost to be capitalized during 2014.

1. Weighted-average accumulated expenditures $

2. Avoidable interest $

3. Amount of interest cost to be capitalized $

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Explanation / Answer

1) Dobbs Corporation Weighted-average accumulated expenditures qualifying for capitalization of interest cost Date Capital Expenditure Period Weighted average Accumulated expenditure 1-Jun-12 $               5,796,000.00 $ 3,381,000.00 31-Aug-12 $               9,240,000.00 $ 3,080,000.00 31-Dec-12 $               7,464,000.00 0 $                      -   Total $ 6,461,000.00 2) Avoidable interest incurred during 2012 Weighted average Accumulated expenditure Approriate Interest rate Avoidable Interest $   5,120,000.00 0.09 $   460,800.00 $   1,341,000.00 0.12 $   160,920.00 $   6,461,000.00 $   621,720.00 Avoidable interest is $   621,720.00 3) Actual Expenditure incurred during 2012 9% bonds payable $5,120,000*.09*7/12 $   268,800.00 12% note payable $1,284,000*.12 $   154,080.00 Total $   422,880.00 Interest cost of capitalization is $   422,880.00

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