Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a c

Question

Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2014 and was completed on December 31, 2014. Dobbs made the following payments to Kiner, Inc. during 2014:

Date Payment

1-Jun-14 $6,156,000

31-Aug-14 9,084,000

31-Dec-14 7,380,000

In order to help finance the construction, Dobbs issued the following during 2014:

1. $5,050,000 of 10-year, 9% bonds payable, issued at par on May 31, 2014, with interest payable annually on May 31.

2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2014 In addition to the 9% bonds payable, the only debt outstanding during 2014 was a $1,270,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on January

1. Compute the amounts of each of the following:

1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.

2. Avoidable interest incurred during 2014.

3. Total amount of interest cost to be capitalized during 2014.

Explanation / Answer

1./

2./

3./

ACTUAL INTEREST INCURRED DURING 2014:

9%BONDS PAYBLE ($5050000 * 9% * 7/12) = $265125

12% NOTE PAYABALE ($1270000 *12%) = $152400

TOTAL = $417525

THE INTEREST THE INTEREST COST TO BE CAPITALIZED IS $417525 (THE LESSER OF THE $642780 AVOIDABLE INTERESTAND THE $417525 ACTUAL INTEREST COST)

DATE CAPITALIZED EXPENDITURE PERIOD WEIGHTED AVERAGE ACCUMULATED EXPENDITURE 1 JUNE 14 $6156000 7/12 $3591000 31 AUG 2014 $9084000 4/12 $3028000 31 DEC 14 $7380000 0 0 TOTAL $6619000

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