Question

Interest Costs During Construction Comprehensive Illustration: On November 1, 2016, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing S100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2017 January 1 $210,000 March 1 $300,000 May 1 $540,000 December 31 $450,000 Total $1,500,000 Interest Costs During Construction Pfeifer Construction completed the building, ready for occupancy, on December 31, 2017. Shalla had the following debt outstanding at December 31, 2017 $750,000 Specific Construction Debt 1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2016, with interest payable annually on December 31 Other Debt 2. 10%, 5-year note payable, dated December 31, 2013, with interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2012, with interest payable annually on December 31 S550,000 S600.000 Compute weighted average accumulated expenditures for 2017 the actual interest and the avoidable interest

Answer 1

Calculation of total borrowing cost incurred during the year ended 31st december, 2017
	Particulars		Calculation	Amount
	15% 750,000 loan		750,000 * 15%	$112,500
	10% 550,000 loan		550,000 * 10%	$55,000
	12 % 600,000 bond		600,000 * 12%	$72,000
				$239,500
Calculation of Borrowing cost eligible for capitalzation
Expenditures incurred in obtaining a qualifying asset are first allocated to any specific borrowings. The remaining expenditures are allocated to any general borrowings
	Amt	Months	Amount Allocated to general Borrowings	Weighted for period outstanding	Amount
January, 01	$210,000	12	-	-
March, 01	$300,000	10	-	-	-
May, 01	$540,000	8	$300,000	18,000,000 x 8/12 =	200,000.00
Dec, 31	$450,000	0	450,000.00	-	-
	$1,500,000				200,000.00
The capitalisation rate relating to general borrowings is the weighted average of the borrowing costs applicable to the
entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.
	550,000.00	10%	55,000.00
	600,000.00	12%	72,000.00
	1,150,000.00		127,000.00
	WACR	11%	(127,000/1,150,000)
Hence Borrowings to be capitalised:
Specific Borrowings
	750,000.00	15%	$112,500.00
General Borrowings
	200,000.00	11%	$22,086.96
	Total avoidable interest cost		$134,586.96