Sherfield Company is constructing a building. Constructio n began on February 1

Question

Sherfield Company is constructing a building. Constructio n began on February 1 and was completed on December 31. Expenditures ere?1,004 000 on March 1, si 204,000 on June 1, and S] 091 100 on December Sheffield Co avoidable terest or Sheffield Com ar mpany bo owed s1 74,200 on March 1 on a 5-year, 139 note to help finance constructio of the build ng In addition the company had outstanding all year a 10%, 5-yea use the Ne hted average interest rale for interest capitalization purposes. Round percenta es lo 2 decand 2 379 600 note payable and an 11% 4-year, s3, 16,400 note payable. Con ute I places, e.g. 2.51 % din inal dnswer to 0 decral places, eg. 5 275. Avoidable interest

Explanation / Answer

Solution:

Specific borrowings for entire year = $1,174,200 * 10/12 = $978,500

General borrowing used in construction of building = $2,319,000 - $978,500 = $1,340,500

Weighted average interest rate to be used for interest capitalzation purpose for general borrowings = 10% * 2379800/5996200 + 11% * 3616400 / 5996200 = 10.60%

Avoidable interest for Shelfield company = $978,500 * 13% + $1,340,500 * 10.60% = $269,298

Construction of Building Schedule of Weighted-Average accumulated expenditure Date Amount Current year capitalization period Weighted Average Accumulated Expenditures 1-Mar $1,884,000.00 10/12 $1,570,000.00 1-Jun $1,284,000.00 7/12 $749,000.00 31-Dec $3,091,100.00 0/12 $0.00 $6,259,100.00 $2,319,000.00

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