Question

On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 March 1, 2021 $1,200,000 690,000 450,000 660,000 945,000 1,260,000 2,250,000 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022 On January 1, 2021, the company obtained a $3 million construction loan with a 12% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $5,500,000 and $7,500,000 with interest rates of 7% and 9%, respectively. Both notes were outstanding during all of 2021 and 2022. Interest is paid annually on all debt. The company's fiscal year-end is December 31.

Answer 1

Capitalization period C=B/12 Weighted Average Accumulated Expenditures D = (A*C) Year 2021 Calculation of weighted Average Accumulated Expenditure Months outstanding from Date of Construction Amount Paid the date of payment to expenses made Dec 2021 January 01, 2021 1,200,000 12 months March 01, 2021 690,000 10 months June 30, 2021 450,000 6 months October 01, 2021 660,000 3 months Total 3,000,000 12/12 10/12 6/12 3/12 (1,200,000 x 12/12) (690,000 x 10/12) (450,000 x 6/12) (660,000 x 3/12) 1,200,000 575,000 225,000 165,000 2,165,000 Calculation of Weighted Average all debt Amount of Loan R [A] $3 Million construction Loan 5% long term notes 7% long term notes Total Weighted Averagae rate of All debts 3,000,000 5,500,000 7,500,000 16,000,000 (1,420,000 / 16,000,000) ate of Interest [B] 12% 7% 9% Interest Amount [A*B] 360,000 385,000 675,000 1,420,000 8.88% Interest to be capitalized in year 2021 (Average accumulated expenditure x Weighted average rate) (2,165,000 x 8.88%) 192,252

In Year 2022 Beginning Expenditure cost (3,000,000 + 192, 252) = $ 3,192,252 Calculation of weighted Average Accumulated Expenditure Months outstanding from Date of Construction Capitalization Amount Incurred the date of payment to 30 expenses made period C =B/9 September 2022 Weighted Average Accumulated Expenditures D = (A*C) January 01, 2022 January 31, 2022 April 30, 2022 August 31, 2022 Total 3,192,252 9 Months 945,000 8 Months 1,260,000 5 Months 2,250,000 1 Months 7,647,252 (3,192,252 x 9/9) (945,000 8/9) (1,260,000 x 5/9) (2,250,000 X 1/9) 3,192,252 840,000 700,000 250,000 4,982,252 Interest to be capitalized in year 2022 (Average accumulated expenditure x Weighted average rate x 9/12) (4,982,252 x 8.88% x 9/12) 331,818 Amount of Interest Capitalized in 2021 $ in 2022 192,252 331,818

1,200,000 690,000 450,000 660,000 2) Cost of Building Expenditures incurred in 2021 January 01, 2021 March 01, 2021 June 30, 2021 October 01, 2021 Add: Interest cost capitalized in 2021 Expenditures incurred in 2022 January 31, 2022 April 30, 2022 August 31, 2022 Add: Interest cost capitalized in 2022 Total Cost of Building 3,000,000 192,252 945,000 1,260,000 2,250,000 4,455,000 331,818 7,979,070 3) Amount of Interest Expense In Year 2021 Total Interest Less: Interest capitalized in 2021 Interest expense 1,420,000 (192,252) 1,227,748 $ In Year 2022 Total Interest Less: Interest capitalized in 2021 Interest expense 1,420,000 (331,818) 1,088,182 $