(a) Determine the amount of interest to be capitalized in 2017 in relation to th

Question

(a)

Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

On December 31, 2016, Monty Inc. borrowed $4,440,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $532,800; June 1, $888,000; July 1, $2,220,000; December 1, $2,220,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $5,920,000 6-year, 11% note, dated December 31, 2014, interest payable annually $2,368,000 2. March 1, 2017, expenditure included land costs of $222,000 3. Interest revenue earned in 2017 $72,520

Explanation / Answer

a). Solution :-

Avoidable Interest = Total Avg. Investment * Rate

= $2257000 * 13%

= $293410

Calculation of Actual Interest Amount :-

Interest Expense = Actual Interest Amount - Avoidable Interest

= $1666480 - $293410

= $1373070

Date Amount ($) Average Investment Mar. 1 532800 10/12 $444000 Jun. 1 888000 7/12 $518000 Jul. 1 2220000 6/12 $1110000 Dec. 1 2220000 1/12 $185000 5860800 $2257000

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