Question

B constructed a warehouse for its own use. B started construction on January 1 and completed construction on December 31.  Construction expenditures were as follows:

• $350,000 on January 1
• $420,000 on May 31
• $250,000 on September 1
• $140,000 on November 1

During the entire year B had the following outstanding notes payable:

• A 5.00%, 5-year $8,000,000 note payable
• A 4.50%, 7-year $4,000,000 note payable
• A 3.00%, 4-year $5,000,000 note payable

1. What were B’s total interest costs for the year?
2. What amount of interest should B capitalize on this construction project?
3. What was B’s interest expense for the year?

When necessary, round any interest rate as follows:  4.873% = 4.9% while 3.314% = 3.3%.

Answer 1

a)
Total interest cost of B for the year
Amount	Interest rate	Interest amount
$    800,000	5%	$     40,000
$    400,000	4.50%	$     18,000
$    500,000	3%	$     15,000
		$     73,000
b)
Interest to be capitalized
Weighted average rate =		800,000x5%+400,000x4.5%+500,000x3%
			1,700,000
	=	4.30%
Borrowig cost = (350,000x4.3%)+(420,000x4.3%x7/12)+(250,000x4.3%x4/12)+(140,000x4.3%x2/12)
	= 30,172
c)
Interest expense for the year
= 73000 - 30172
= 42828