On December 31, 2013, Main Inc. borrowed $5,100,000 at 12% payable annually to f

Question

On December 31, 2013, Main Inc. borrowed $5,100,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $612,000; June 1, $1,020,000; July 1, $2,550,000; December 1, $2,550,000. The building was completed in February 2015. Additional information is provided as follows.

1. Other debt outstanding

10-year, 11% bond, December 31, 2007, interest payable annually $6,800,000

6-year, 10% note, dated December 31, 2011, interest payable annually $2,720,000

2. March 1, 2014, expenditure included land costs of $255,000

3. Interest revenue earned in 2014 $83,300

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

Explanation / Answer

Answer:

Note: Interest on land expenditure during construction is capitalized to the building cost, not the land.

The amount of interest to be capitalized in 2014 in relation to the construction of the building is $1320900.

Expenditure 2014 Average investment 1-Mar 612000 5/6 510000    1-Jun 1020000 3/5 595000    1-Jul 2550000 1/2 1275000    1-Dec 2550000 0.083333333 212500    Total 2592500    Loans: Issued: Actual int cost 12%to finance construction 5100000 12/31/2013 612000 11% Bond 6800000 Years ago 748000 10% Bond 2720000 Years ago 272000 1632000 Average investment Avoidable interest cost 2592500    12% 311100 Interest capitalized 1320900

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