Question

The following three situations involve the capitalization of interest. Situation I On January 1, 2017, Temarisk, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,215,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Tamar k borrowed $4,215,000 payable in 10 annual stal mets of $421,500, plus interest at the rate of 10%. During 2017, Tamarisk made deposit and progress payments totaling $1,580,625 under the contract; the weighted average amount of accumulated expenditures was $843,000 for the year. The excess borrowed funds were invested in short-term securities, from which Tamarisk realized investment income of $256,400 What amount should Tamarisk report as capitalized interest at December 31, 2017? Capitalized interest Situation II During 2017, Vaughn Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities Interest Costs Incurred Warehouse constructed for Vaughn's own use $31,800 Special-order machine for sale to unrelated customer, produced according Inventories routinely manufactured, produced on a repetitive basis All of these assets required an extended period of time for completion Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized? The total amount of interest costs to be capitalized 8,330 8,750 40,130 Situation III Bramble, Inc. has a fiscal year ending April 30 On May 1 2017 Bramble borrowed $9,898 000 at 11% to finance construction of its own building. Repayments of the loan are to commence te month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled $6,928,600. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $643,370 for the year. How much should be shown as capitalized interest on Bramble's financial statements at April 30, 2018 Capitalized interest on Bramble's financial statements

Answer 1

Ans- Situation 1- Weighted average accumulated expenses= $843,000

Avoidable interest for the period= Weighted average rate of interest * Weighted average accumulated expenses

=10%* 843,000

=$84,300

All the expenses are paid from the borrowed amount . Further in this case, the weight average interest rate is 10%.   

Actual interest paid during the year= $4,215,000*10%

=$421,500

Interest to be capitalised on 31 dec 2017 should be avoidable interest provided it does not exceed the actual interest.

Therefore, interest to be capitalised =$84,300

Situation-2- Capitalized Interest:-

Warehouse	$31,800
Special-Order Machine	$8,330
The total amount of interest costs to be capitalized	$40,130

Inventories that are routinely produces do not qualify for interest capitalization.

Situation-3-

Capitalized interest = Weighted average accumulated expenditure * Interest rate

Weighted average accumulated expenditure= $6,928,600/ 2= $3,464,300

Capitalized interest= $3,464,300*11%

=$381,073

Interest earned on the unexpended portion of loan is not to be offset against the interest eligible for capitalization.

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