*Problem 10-7 Oriole Inc. is a book distributor that had been operating in its o
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*Problem 10-7 Oriole Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to arn annual growth rate of 15% for Oriole since 2012, Oriole, original facility became obsolete by early 2017 because of the increased sales volume and the fact that Oriole now carries CDs in addition to books. On June 1, 2017, Oriole contracted with Black Construction to have a new building constructed for $5,200,000 on land owned by Oriole. The payments made by Oriole to Black Construction are shown in the schedule below. Date Amount July 30, 2017 January 30, 2018 May 30, 2018 $1,170,000 1,950,000 2,080,000 $5,200,000 Total payments Construction was completed and the building was ready for occupancy on May 27, 2018. Oriole had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year 10%, 5-year note payable of $2,600,000, dated April 1, 2014, with interest payable annually on April 1. 12%, 10-year bond issue of $3,900,000 sold at par on June 30, 2010, with interest payable annually on June 30 The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Compute the weighted-average accumulated expenditures on Oriole's new building during the capitalization period Weighted-Average Accumulated Expenditures s Compute the avoidable interest on Oriole's new building. (Round intermediate percentage calculation to 1 decimal place, e.g. 15.6% and final answer to 0 decimal places, eg. 5,125.) Avoidable Interest Some interest cost of Oriole Inc. is capitalized for the year ended May 31, 2018. Compute the amount of each items that must be disclosed in Oriole's financial statements. Total actual interest cost Total interest capitalized Total interest expensed sExplanation / Answer
1) Calculation of Weighted Average Accumulated Expenditures (Amount in $)
2) For calculating Avoidable interest, we need a weighted average interest rate which is calculated as follows:-
Loan Outstanding during construction period
Weighted Average rate = (Total interest/Total Principal)*100 = (728,000/6,500,000)*100 = 11.20%
Avoidable Interest = Weighted average accumulated expenditure*weighted average rate
= $1,625,000*11.20% = $182,000
3) Total Actual Interest cost = $728,000
Total interest capitalized = Avoidable interest cost = $182,000
Total interest expensed = ($728,000-$182,000) = $546,000
Expenditure Date Amount Capitalization period Weighted Average Accumulated expenditure July 30, 2017 1,170,000 10 months (from August to May) 1,170,000*10/12 = 975,000 January 30, 2018 1,950,000 4 months (from February to May) 1,950,000*4/12 = 650,000 May 30, 2018 2,080,000 0 0 Total 5,200,000 1,625,000Related Questions
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