Question

7. (7 points) A building was constructed on land purchased last year at a cost of $150,000. Construction began on January 1 and was completed on December 31. The payments to the contractor were as follows. Date Payment 1/1 $120,000 4/1   320,000 8/1   460,000 10/1   100,000 To finance construction of the building, a $400,000, 12% construction loan was taken out on January 1. The loan was repaid on December 31. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%. Determine the amount of interest to be capitalized.

7. (7 points) A building was constructed on land purchased last year at a cost of $150,000. Construction began on January 1 and was completed on December 31. The payments to the contractor were as follows. Date Payment 1/1 $120,000 4/1 320,000 8/1 460,000 10/1 100,000 To finance construction of the building, a $400,000, 12% construction loan was taken out on January 1. The loan was repaid on December 31. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%. Determine the amount of interest to be capitalized.

Answer 1

Answer:

Interest to be capitalized is $ 62,133
Date	Expenditure	Capitalized Period	Weight	Weighted Expenditure
Jan-01	1,20,000	12/12	1.00	1,20,000
Apr-01	3,20,000	09/12	0.75	240,000
Aug-01	4,60,000	5/12	0.42	1,91,667
Oct-01	1,00,000	3/12	0.25	25,000
	10,00,000			5,76,667
	Loan	Principal	Rate	Annual Interest
	Debt	200,000	8%	16,000
	Weighted Average Interest Rate			16,000 / 200,000
				8%
	Funding	Amount	Rate	Avoidable Interest
	Specific Loan	4,00,000	12%	48,000
	Debt(576,667-400000)	1,50,000	8%	14,133
				62,133