Date Amount $1,365,300 2,275,500 2,427,200 $6,068,000 Laserwords Inc. is a book
ID: 2716761 • Letter: D
Question
Date
Amount
$1,365,300
2,275,500
2,427,200
$6,068,000
Laserwords 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 an annual growth rate of 15% for Laserwords since 2009. Laserwords’ original facility became obsolete by early 2014 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.On June 1, 2014, Laserwords contracted with Black Construction to have a new building constructed for $6,068,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.
Date
Amount
July 30, 2014$1,365,300
January 30, 20152,275,500
May 30, 20152,427,200
Total payments$6,068,000
Construction was completed and the building was ready for occupancy on May 27, 2015. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2015, the end of its fiscal year.
10%, 5-year note payable of $3,034,000, dated April 1, 2011, with interest payable annually on April 1.
12%, 10-year bond issue of $4,551,000 sold at par on June 30, 2007, 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.
Explanation / Answer
Answer:
Required:
a.Compute the weighted average accumulated expenditures on Laserwords’ new building during the capitalization period.
July 30, 2010 $1,365,300 x 10/12 = $1,137,750
January 30, 2011 $2,275,500 x 4/12 = 758,500
May 30, 2011 $6,068,000 x 0 = 0
$1,896,250
b.Compute the avoidable interest on Laserwords’ new building.
Weighted average interest rate
$3,034,000 x 10% = $303,400
$4,551,000x 12% = 546,120
$7,585,000 $849,520
Therefore,
$849,520 = 11.2%
$7,585,000
Weighted average accumulated expenditures x weighted avg int rate = avoidable interst
$1,896,250 x 11.2% = $212,380
c.
Summarize the information requested below:
Fiscal Year
Ending 5/31/11
Total actual interest cost 849,520
Less:Total interest capitalized 212,380
Total interest expensed 637,140
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