1. Cooper, Inc., is constructing a building that qualifies for interest capitali

Question

1. Cooper, Inc., is constructing a building that qualifies for interest capitalization. The following information is available:

Capitalization period: January 1, 2013-December 31, 2014

            Expenditures on project (incurred evenly):

2013

$30,000

2014

$50,000

Amounts borrowed and outstanding (all debt incurred January 1, 2013)

          $10,000 at 10% (specifically for the construction project)

          $18,000 at 11% (general debt)

            $30,000 at 13% (general debt)

Required:

a.

Compute the amount of interest that should be capitalized in 2013 and 2014. (Round interest rates to the nearest hundredths, e.g., 07.62%.)

b.

Assume that in 2013 unused borrowed funds were invested and earned interest revenue amounting to $800. How much interest now should be capitalized to the asset account in 2013?

2013

$30,000

2014

$50,000

Explanation / Answer

a) Amount of interest that should be capitalized in 2013 and 2014 2013 (Specific Borrowings) Balance from GB Cost Incurred $30,000 $10,000 $20,000 Interest Rate 10% 12.84% Amount to be to be Capitalise $1,000 $2,568 Total Interest to be capitalise $3,568 (Specific Borrowings) Balance from GB 2014 Cost Incurred $50,000 $10,000 $40,000 Interest Rate 10% 12.84% Amount to be to be Capitalise $1,000 $5,137 Total Interest to be capitalise $6,137 Note 1 Borrowing Loan Amount Interset Rate Interset Amount 1 Specifically for the construction project $10,000 10% $1,000 2 General Debt $18,000 11% $1,980 3 General Debt $30,000 13% $3,900 Total Borrowing $58,000 $6,880 Loan Interest Specific Borrowing $10,000 $1,000 General Borrowing $48,000 $5,880 Weighted Average Capitalisation Rate for General Borrowings                               (Total Interest-Interest on Specific Borrowings) / (Total Borrowings-Specific Borrowings) = =(5880-1000)/(48000-10000) 12.84% b) If unused borrowed funds were invested and earned interest revenue amounting to $800. Weighted Average Capitalisation Rate for General Borrowings                               (Total Interest-Interest on Specific Borrowings) / (Total Borrowings-Specific Borrowings) = =(5880-1000-800)/(48000-10000) 10.74% 2013 (Specific Borrowings) Balance from GB Cost Incurred $30,000 $10,000 $20,000 Interest Rate 10% 10.74% Amount to be to be Capitalise $1,000 $2,147 Total Interest to be capitalise $3,147

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