Rules: 1. Interest can only be capitalized on building costs incurred during the
ID: 2535509 • Letter: R
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Rules: 1. Interest can only be capitalized on building costs incurred during the construction period 2. If the company takes a construction loan for this project, and this is the only loan for the company, the interest rate for the construction loan will be used to capitalize interest. Example 1 $100,000 W.A.A.E Construction loan 200,000 @ 10% Date Account Debit Credit Building Interest Expense 10,000 10,000 Cash 20,000 Example 2 W.A.A.E Construction loan 300,000 200,000 @ 10% Date Account Building Cash Debit Credit 20,000 20,000Explanation / Answer
In the first example, the loan amount is $200,000 but the weighted accumulated expenditure on construction is only $100,000. Thus Interest @ 10% on the first $100,000 loan will be capitalized and to capitalize that account building account is debited by(100000*0.1) = $10,000. The rest oof the loan is not for construction so it is normal interest expense.
In example 2, the loan amount is less than weighted accumulated expenditure on construction of building thus the whole loan is used for construction, because of this the whole interest is capitalized and debited to building account.
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