On January 1, 2016, Kendall Inc. began construction of an automated cattle feede

Question

On January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2017. Expenditures on the project were as follows:

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2016 and 2017.

Interest capitalized for 2017 was ?

January 1, 2016 $200,000 September 1, 2016 $300,000 December 31, 2016 $300,000 March 31, 2017 $300,000 September 30, 2017 $200,000

Explanation / Answer

Solution:

Average accumulated expenditures for 2016 was:

= (200,000 * 12/12) + (300,000 * 4/12) + (300,000 * 0/12)

= 200,000 + 100,000 + 0

= 300,000

Interest capitalized for 2016 was:

= [(200,000 * 12/12) + (300,000 * 4/12) + (300,000 * 0/12)] * 12%

= [300,000] * 12%

= 36,000

Average accumulated expenditures for 2017 was:

Accumulated expenditure in 2016 = (200,000 + 300,000 + 300,000 + Interest capitalized 36,000) * 9/9

= (836,000) * 9/9

= 836,000

March 31, 2017 = 300,000 * 6/9 = 200,000

September 30, 2017 = 200,000 * 0/9 = 0

Average accumulated expenditures for 2017 was = 836,000 + 200,000 + 0 = 1,036,000

Interest capitalized for 2017 was:

Specific borrowing = 750,000 * 9/12 * 12% = 67,500

Excess = (Accumulated expenditure in 2017) 1,036,000 – (Total borrowing in 2016) 750,000

= 286,000 * 9/12 * 9% = 19,305

Interest capitalized for 2017 = 67,500 + 19,305 = 86,805

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