2. On February 1, 2018, Sun Devil Company purchased land for a warehouse & distr

Question

2. On February 1, 2018, Sun Devil Company purchased land for a warehouse & distribution center for $540,000. To help finance the land and construction of the distribution center, $1,725,000 was borrowed on February 1, 2018 on a 9%, 3-year note payable, with interest payable annually every February 1st. Sun Devil began construction on the facility on March 1st. The following expenditures were incurred for construction: March 1 $ 360,000 May 1 $ 504,000 June 1 $ 900,000 August 1 $1,440,000 The facility was completed and ready for occupancy on August 31st. Other than the construction note, the only debt outstanding during 2018 was a $500,000, 12%, 6-year note payable dated January 1, 2017. a. Determine the Weighted Average Accumulated Expenditures: $___________________________
b. Using the information presented in #2 above, determine the Avoidable Interest: $_____________________ c. Using the information presented in #2 above, determine the historical cost Sun Devil should report for the warehouse & distribution center: $______________________________ d. formation presented in #2 above, determine Interest Expense for the year ended December 31, 2018: $_____________________________ e. If instead of having $500,000 of non-specific borrowing in #2 above, suppose Sun Devil only had $75,000 of other long-term debt at 12% that was dated January 1, 2017. In this case, what amount of interest cost should be capitalized? $_______________________ 2. On February 1, 2018, Sun Devil Company purchased land for a warehouse & distribution center for $540,000. To help finance the land and construction of the distribution center, $1,725,000 was borrowed on February 1, 2018 on a 9%, 3-year note payable, with interest payable annually every February 1st. Sun Devil began construction on the facility on March 1st. The following expenditures were incurred for construction: March 1 $ 360,000 May 1 $ 504,000 June 1 $ 900,000 August 1 $1,440,000 The facility was completed and ready for occupancy on August 31st. Other than the construction note, the only debt outstanding during 2018 was a $500,000, 12%, 6-year note payable dated January 1, 2017. a. Determine the Weighted Average Accumulated Expenditures: $___________________________
b. Using the information presented in #2 above, determine the Avoidable Interest: $_____________________ c. Using the information presented in #2 above, determine the historical cost Sun Devil should report for the warehouse & distribution center: $______________________________ d. formation presented in #2 above, determine Interest Expense for the year ended December 31, 2018: $_____________________________ e. If instead of having $500,000 of non-specific borrowing in #2 above, suppose Sun Devil only had $75,000 of other long-term debt at 12% that was dated January 1, 2017. In this case, what amount of interest cost should be capitalized? $_______________________ 2. On February 1, 2018, Sun Devil Company purchased land for a warehouse & distribution center for $540,000. To help finance the land and construction of the distribution center, $1,725,000 was borrowed on February 1, 2018 on a 9%, 3-year note payable, with interest payable annually every February 1st. Sun Devil began construction on the facility on March 1st. The following expenditures were incurred for construction: March 1 $ 360,000 May 1 $ 504,000 June 1 $ 900,000 August 1 $1,440,000 The facility was completed and ready for occupancy on August 31st. Other than the construction note, the only debt outstanding during 2018 was a $500,000, 12%, 6-year note payable dated January 1, 2017. a. Determine the Weighted Average Accumulated Expenditures: $___________________________
b. Using the information presented in #2 above, determine the Avoidable Interest: $_____________________ c. Using the information presented in #2 above, determine the historical cost Sun Devil should report for the warehouse & distribution center: $______________________________ d. formation presented in #2 above, determine Interest Expense for the year ended December 31, 2018: $_____________________________ e. If instead of having $500,000 of non-specific borrowing in #2 above, suppose Sun Devil only had $75,000 of other long-term debt at 12% that was dated January 1, 2017. In this case, what amount of interest cost should be capitalized? $_______________________

Explanation / Answer

Requirement 1 Determination of weighted average accumulated Expenditures Amount of expenditure Weight Factor Weighted average accumulated expenditure 2018 Feb-01 540000 6/12 270000 Mar-01 360000 6/12 180000 May-01 504000 4/12 168000 Jun-01 900000 3/12 225000 Aug-01 1440000 1/12 120000 Total 3744000 Weighted average accumulated expenditure 963000 Requirement 2 Avoidable Interest Specific Borrowing 963000 Rate of Interest 9% Period of Interest 12 Months Amount of Interest on specific borrowings 86670 Total avoidable interest = 86670 Actual Interest during capitalization period =1725000*9%*6/12 77625 =500000*12%*6/12 30000 Total actual Interest 107625 Since avoidable interest does not exceed actual interest, the capitalized interest would be 86670 Requirement 3 Historical cost of warehouse & distribution center Total cost 3744000 Capitalised Interest 86670 Historical cost 3830670 Requirement 4 Interest expense Total Interest on general borrowings Specific borrowing =1725000*9% 155250 General borrowing =500000*12% 60000 Amount of Interest 215250 Less : Interest capitalized 86670 Interest expense for the year 2018 128580 Requirement 5 Specific Borrowing 963000 Rate of Interest 9% Period of Interest 12 months Amount of Interest on specific borrowings 86670 Total avoidable 86670 The actual Interest during capitalized period =1725000*9%*6/12 77625 =75000*12%*6/12 4500 Total actual Interest 82125 Since actual interest is less than avoidable interest, the actual interest of $82125 will be capitalized

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