A company constructs a building for its own use. Construction began on January 1

Question

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $510,000: March 31, $610,000: June 30, $410,000; October 30, $630.000. To help finance construction, the company arranged a 8% construction loan on January 1 for $720,000 The company's other borrowings, outstanding for the whole year, consisted of a $2 million loan and a $4 million note with interest rates of 10% and 7%, respectively. Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. 0.1234 should be entered as 12.34%).)

Explanation / Answer

Step 1 : Determine the time - weighting average accumulated expenditure :

January 1 510,000 * 12/12 = 510,000 March 31 610,000 * 9 /12 = 457,500 June 30 410,000 * 6 / 12 = 205,000 October 30 630,000 * 2 /12 = 105,000

Average Accumulated Expenditure = $ 12,77 ,500

Step 2:Calculate the amount of interest to be capitalized :.

Interest Capitalised = 12,77,500 * 8 % = $ 102200

The interest of $102200 is added to the cost of the building, bringing accumulated expenditures at December 31, ( 510,000 + 610,000 + 410,000 + 630,000 + 102,200 ) to $ 22,62200 . The remaining interest cost incurred but not capitalized as expense

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