Question

P10.7 (LO2) 102) Groupwork (Capitalization of Interest) Laser werden had been operating in its original facility tinuing education requirements in several prof OF Laserwords since 2015. Laserwords' original facility beca increased sales volume and the fact that Laserwo On June 1, 2020, Laserwords contracted with B for $4,000,000 on land owned by Laserwords. The payments made are shown in the schedule below user words Inc. is a book distributor that Binal facility since 1990. The increase in certification programs and con- in several professions has contributed to an annual growth rate of 15% words original facility became obsolete by early 2020 because of the met that Laserwords now carries CDs in addition to books. words contracted with Black Construction to have a new building constructed y Laserwords. The payments made by Laserwords to Black Construction Date Amount July 30, 2020 $ 900,000 January 30, 2021 1,500,000 May 30, 2021 1,600,000 Total payments $4,000,000 Construction was completed and the building was had no new borrowings directly associated w as completed and the building was ready for occupancy on May 27, 2021. Laserwords owings directly associated with the new building but had the following debt outstanding at May 31, 2021, the end of its fiscal year. 10%, 5-year note na 0, 3year note payable of $2,000,000, dated April 1, 2017. with interest payable annually on April 270, 10-year bond issue of $3,000,000 sold at par on June 30, 2013, with interest payable annually on June 30. The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Instructions a. Compute the weighted-average accumulated expenditures on Laserwords' new building during the capitalization period. b. Compute the avoidable interest on Laserwords' new building. (Round to one decimal place.) c. Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2021. 1. Identify the items relating to interest costs that must be disclosed in Laserwords' financial statements. 2. Compute the amount of each of the items that must be disclosed. (CMA adapted)

Answer 1

Part A

Weighted-Average Accumulated Expenditures

$1250000

Date	Amount	x	Capitalization period	=	Weighted-Average Accumulated Expenditures
July 30, 2020	900000		10/12		750000
January 30, 2021	1500000		4/12		500000
May 30, 2021	1600000		0		0
					1250000

Part B

Avoidable Interest

$140000

Avoidable interest = Weighted-Average Accumulated Expenditures × Weighted-Average Interest Rate = 1250000*11.20% = $140000

Loans outstanding	Principal	Actual interest
10% five-year note	2000000	200000
12% ten-year bond	3000000	360000
	5000000	560000

weighted-average interest rate = total interest / total principal = 560000/5000000 = 11.20%

Part C

1. Items related to interest costs	2. Amount
Total actual interest cost	$560000
Total interest capitalized	$140000
Total interest expensed	$420000

Smaller of avoidable interest or actual interest is to be capitalized.