Problem 4 Early in 2012, Dobbs Corporation engaged Kiner, Inc. to design and con

Question

Problem 4

Early in 2012, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on Jan. 2, 2012 and was completed on December 31, 2012. Dobbs made the following payments to Kiner, Inc. during 2012:

Date                                              Payment

January 2, 2012                            $1,200,000

June 1, 2012                                   3,600,000

August 31, 2012                             6,000,000

December 31, 2012                        6,000,000

In order to help finance the construction, Dobbs issued the following during 2012:

1.   $4,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2012, with interest payable annually on May 31.

2.   1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2012.

In addition to the 9% bonds payable, the only debt outstanding during 2012 was a $1,000,000, 12% note payable dated January 1, 2008 and due January 1, 2018, with interest payable annually on January 1.

Instructions

Compute the amounts of each of the following (show computations):

1.   Weighted-average accumulated expenditures qualifying for capitalization of interest cost.

2.   Avoidable interest incurred during 2012.

3.   Total amount of interest cost to be capitalized during 2012.

Explanation / Answer

1 Date Capitalization Expenditures Period Weighted-Average Accumulated Expenditures January 2 $           1,200,000 12/12 $                      1,200,000 June 1               3,600,000 7/12                          2,100,000 August 31               6,000,000 4/12                          2,000,000 December 31               6,000,000 0 0 Ans 1 $                      5,300,000 2 Weighted-Average Accumulated Expenditures Appropriate Interest Rate Avoidable Interest $4,000,000 9%        360,000 $1,300,000 12%        156,000 $5,300,000 $    516,000 Ans 2 3 Actual Interest incurred during 2012 9% bonds payable, $4,000,000 x .09 x 7/12                              210,000 12% note payable, $1,000,000 x .12                              120,000 Ans 3 $                         330,000 The interset cost to be capitalized is $330,000 (the lesser of the $516,000 Avoidable interest and the $330,000 actual interest cost)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.