On January 1, 2018, the Marjlee Company began construction of an office building to be used...
On January 1, 2018, the Marjlee Company began construction of an
office building to be used as its corporate headquarters. The
building was completed early in 2019. Construction expenditures for
2018, which were incurred evenly throughout the year, totaled
$9,000,000. Marjlee had the following debt obligations which were
outstanding during all of 2018:
| Construction loan, 11% | $ | 2,250,000 | |
| Long-term note, 10% | 3,000,000 | ||
| Long-term note, 7% | 6,000,000 | ||
Required:
Calculate the amount of interest capitalized in 2018 for the
building using the specific interest method.
Homework Answers
Solution:
Average Accumulated Expenditure = $9,000,000/ 2 = $4,500,000
| Weighted average interest rate of all other debt | |||
| Debt | Amount | Interest rate | Interest amount |
| 10% Note | $30,00,000 | 10% | $3,00,000 |
| 7% Note | $60,00,000 | 7% | $4,20,000 |
| Totals | $90,00,000 | $7,20,000 | |
| Weighted average rate (total interests/ total debt) | 8.00% | ||
| Year 2018: Interest Capitalized | ||||
| Average | Interest Rate | Capitalized Interest | ||
| Construction Loan | $22,50,000 | 11.00% | $2,47,500 | |
| Other debt ($4,500,000 - $2,250,000) | $22,50,000 | 8.00% | $1,80,000 | |
| Total Interest Capitalized | $4,27,500 | |||
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