Question

On January 1, 2018, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The only interest-bearing debt the company had outstanding during 2018 was long-term bonds with a book value of $10,600,000 and an effective interest rate of 9%. Construction expenditures incurred during 2018 were as follows:

January 1	$	560,000
March 1		636,000
July 31		516,000
September 30		660,000
December 31		360,000

Required:
Calculate the amount of interest capitalized for 2018.
  

Answer 1

>> Interest Amount = $ 10,600,000 * 9 % = $ 954,000.

>> Weighted Average capital =[$ 560,000 *( 12/12 )]+ [$ 636000 *( 10/12 )] + [$516,000 *(5/12 )] + [$660,000 *( 3/12 )].

>> Weighted Average capital = $ 1,470,000.

>> Interest to be capitalized = $ 954,000 * ( $ 1,470,000 / $ 10,600,000 )

>> Interest to be capitalized = $ 132,300.