On December 31, 2013, Main Inc. borrowed $5,400,000 at 13% payable annually to f

Question

On December 31, 2013, Main Inc. borrowed $5,400,000 at 13% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $648,000; June 1, $1,080,000; July 1, $2,700,000; December 1, $2,700,000. The building was completed in February 2015. Additional information is provided as follows.

Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building.

1. Other debt outstanding 10-year, 12% bond, December 31, 2007, interest payable annually $7,200,000 6-year, 11% note, dated December 31, 2011, interest payable annually $2,880,000 2. March 1, 2014, expenditure included land costs of $270,000 3. Interest revenue earned in 2014 $88,200

Explanation / Answer

Annualized Expenditure Payment Date Amount of Expenditure No.of months Annualized 1-Mar 648000 10 540000 1-Jun 1080000 7 630000 1-Jul 2700000 6 1350000 31-Dec 2700000 1 225000 Total 2745000 Note Interest on land during construction is capitalized to building cost Note as specific loan is $5400000 so other loans will not be taken into consideration for avoidable Interest Avoidable Interest Amount Interest Avoidable Interest Specific Loan 2745000 13% 356850 Total 2745000 356850 Weighted Average on other loans Particular Principal Interest Specific Loan 5400000 356850 10%, 12 year Bond 7200000 720000 11%,6 year Bond 2880000 316800 Total 15480000 1393650 Interest cost out of which $356850 wiil be capitalzed Interest to be capitalized $356,850 Ans

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