7. On 01/01/2016, Dreamworld Co. began construction of a new warehouse. The buil

Question

7. On 01/01/2016, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on 03/31/2017. Expenditures on the project were as follows: 01/01/2016 $300,000 07/01/2016 $800,000 01/01/2017 $400,000 Dreamworld took a $500,000, 10% construction loan on 01/01/2016. Dreamworld also had $1,000,000 in other interest-bearing debt with a weighted-average rate of 8%. All the debt obligations were outstanding from 01/01/2016 to 03/31/2017. In 2016, Dreamworld should capitalize interest of: A. $50,000 B. $66,000 C. $80,000 D. $98,000

Explanation / Answer

Weighted average Investment in 2016 : [300000*12/12]+[800000*6/12]

              = 300000+ 400000

              = $ 700,000

Interest on specific loan = 500000*.10 = 50000

Interest on general loan :; [700000-500000]*.08 = 16000

Total interest :50000+16000=66000

correct option is "B"

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