Question

Matrix Inc. borrowed $1,000,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2016, and was completed on October 31, 2016. Expenditures related to this building were: January 1 $252,000 (includes cost of purchasing land of $150,000) May 1 310,000 July 1 420,000 October 31 276,000 In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.

1) Compute the amount of interest capitalized related to the construction of the building.

2) If the expenditures are assumed to have been incurred evenly throughout the year:

a) Compute weighted average accumulated expenditures

b) Compute the amount of interest capitalized on the building

Answer 1

Ans-1- Calculating of average expenditure is as follows:-

Date	Expenditure	No. of Months	Average Expenditure
January 1, 2016	102,000	10	$85,000 ($102,000*10/12)
May 1, 2016	310,000	6	$155,000 ($310,000*6/12)
July 1, 2016	420,000	4	$140,000 ($420,000*4/12)
October 31, 2016	276,000	0	$0 ($276,000*0/12)
Total			$380,000

Calculation of amount of interest capitalized as follows:-

Amount of interest capitalized =Average expenditure * Rate of interest / 100

=$380,000*8/100

=$30,200

Ans--2-a- Calculation of weighted average accumulated expenditure is as follows:-

Date	Expenditure	No.of Months	Average Expenditure
January 1, 2016	$102,000	12	$102,000 ($102,000*12/12)
May 1, 2016	$310,000	8	$206,666.67 ($310,000*8/12)
July 1, 2016	$420,000	6	$210,000 ($420,000*6/12)
October 31, 2016	$276,000	2	$46,000 ($276,000*2/12)
Total			$564,666.67

Calculation of interest on weighted average expenditure is as follows:-

Amount of interest= Total weighted average expenditure*Rate of interest / 100

=$564,666.67*8/100

=$45,173.33

The average rate of interest is as follows:-

Average rate of interest= Interest on specific loan + interest on general loan/ Total loan outstanding *100

=$45,173.33+ $125,000 ($500,000*9/100+$800,000*10/100)/ $2,300,000 ($1,000,000+$500,000+$800,000)*100

=7.40%

b-Calculation of interest to be capitalized is as follows:-

Interest to be capitalized= Amount of specific loan * Average rate of interest *100

=$1,000,000*7.40/100

=$74,000