Question

Testbank Problem 140 Early in 2020, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2020 and was completed on December 31, 2020. Dobbs made the following payments to Kiner, Inc. during 2020: Payment Date $1,600,000 June 1, 2020 2,400,000 August 31, 2020 December 31, 2020 2,000,000 In order to help finance the construction, Dobbs issued the following during 2020 1. $1,360,000 of 10-year, 9% bonds payable, issued at par on May 31, 2020, with interest payable annually on May 31 2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2020. In addition to the 9% bonds payable, the only debt outstanding during 2020 was a $340,000, 12% note payable dated January 1, 2016 and due January 1, 2023, with interest payable annually on January 1 Compute the amounts of each of the following: 1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost. 2. Avoidable interest incurred during 2020. 3. Total amount of interest cost to be capitalized during 2020. 1. Weighted-average accumulated expenditures Avoidable interest 2. 3. Amount of interest cost to be capitalized

Answer 1

1) Weighted-average accumulated expenditures qualifying for capitalization of interest cost: Weighted-Average Capitalization Period Date Expenditure Accumulated Еxpenditures (c a b) $933,333 (a) (b) 7/12 June 1, 2020 $1,600,000 August 31, 2020 4/12 $800,000 $2,400,000 December 31, 2020 $2,000,000 0 $0 $1,733,333 2) Avoidable interest incurred during 2020 Interest on specific loan taken for project Interest on general loan =(S1,360,000 9%) +[($1,733,333 - 1,360,000)* 12%] Avoidable interest incurred during 2020= = S122,400 $44,780 = $167,200 3) Total amount of interest cost to be capitalized during 2020 Actual interest incurred during 2020: 9% bonds payable $1,360,000 9%* 7/12 = $71,400 $40,800 S112,200 12% note payable $340,000 12% The interest cost to be capitalized during 2020 is equal to lower of avoidable interest incurred or actual interest cost (ie: lower of $167,200 or $112,200) So, Interest cost to be capitalized is $112,200