During 20X2, Woolworth, Inc. constructed a building for its own use costing a to

Question

During 20X2, Woolworth, Inc. constructed a building for its own use costing a total of $8,600,000. The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 20X2 were $4,600,000. Woolworth had the following debt outstanding at December 3, 20X2. 9%, ten-year bonds issued at par on December 31, 20X0, with interest payable annually on December 31: $7,100,000 10%, three-year note payable, dated January 1, 20X1, with interest payable annually on January 1: 4,300,000 11%, five-year note to finance construction of this building, dated January 1, 20X2, with interest payable annually on January 1: $3,500,000 1) Compute the amounts of each of the following. (Show computations in an organized manner). Carry calculations to 4 decimal places. A) Total Interest for 20X2: B) Avoidable interest for 20X2: C) Show the interest expense section of the income statement (or supplemental footnote) for trump for the year ending December 31, 20X2.

Explanation / Answer

A. Total interest for Year 2012 :- $ 1454000

B. Computation of Avoidable interest for Year 2012 = $ 448886

  Weighted average interest rate = 1454000 / 14900000

= 0.097584

= 0.097584 * 100 = 9.7584 %  

Avoidable interest = 4600000 (Accumulated expenditure) * 9.7584% = $ 448886 (approx)

This $ 448886 is to be Capitalized. So, the amount of interest expense to be charged to Income statement

= (1454000 - 448886)

= $ 1005114

C) Interest expense to be shown in income statement = $ 1005114

Particulars Interest amount 9%, Ten year bonds (7100000 * 9%) 639000 10%, Three year note payable ( 4300000 * 10%) 430000 11%, Five year note payable ( 3500000 * 11%) 385000 Total interest for year 2012 1454000

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