Problem 1 Capitalization of interest (15 points) Early in 2013, Dobbs Corporatio

Question

Problem 1 Capitalization of interest (15 points) Early in 2013, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2013 and was completed on December 31, 2013. Dobbs made the following payments to Kiner, Inc. during 2013: Date Payment June 1, 2013 $3,600,000 August 31, 2013 5,400,000 December 31, 2013 4,500,000 During 2013, in order to help finance the construction, Dobbs issued $3,000,000 of 10–year, 9% bonds payable, issued at par on May 31, 2013, with interest payable annually on May 31. In addition to the 9% bonds payable, the only debt outstanding during 2013 was a $750,000, 12% note payable dated January 1, 2009 and due January 1, 2019, with interest payable annually on January 1. Instructions:Compute the amounts of each of the following. Show and label all calculations. Weighted–average accumulated expenditures qualifying for capitalization of interest cost. Avoidable interest incurred during 2013. Total amount of interest cost to be capitalized during 2013.

Explanation / Answer

Answer

Weighted–average accumulated expenditures qualifying for capitalization of interest cost

Avoidable interest incurred during 2013

Actual interest incurred during 2014:

9% bonds payable, $3,000,000 × .09 × 7/12 = $157,500

12% note payable, $750,000 × .12 =$90,000

The interest cost to be capitalized is $247,500 (the lesser of the $360,000 avoidable interestand the $347,500 actual interest cost)

Date Capital expenditure Period Weighted Avg Acc expenditure June 1, 2013 $3,600,000 7/12 $2,100,000 August 1, 2013 $5,400,000 4/12 $1,800,000 Dec 1,2013 $4,500,000 0 0 $3,900,000

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