Question

Keiron Industries began construction of a warehouse on July 1, year 1. The project was completed on March 31, year 2. No new loans were required to fund construction. Keiron does have the following two interest-bearing liabilities that were outstanding throughout the construction period: $3,000,000, 10% note $7,000,000, 5% bonds Construction expenditures incurred were as follows: July 1, year 1 September 30, year 1 November 30, year 1 January 30, year 2 $500,000 600,000 400,000 550,000 The company's fiscal year-end is December 31. Required: Calculate the amount of interest capitalized for year 1 and year 2.

Answer 1

Ans: Average Accumulated depreciation for 2018=

July 1= $500,000*6/6= $500,000

Sep 30= $600,000*3/6= $300,000

Nov 30= 400,000*1/6= $66,667

= $866,667

Interest rate capitalized in 2018= $866,667*6.5%6/12

= $ 28,167

Weighted average rate for all debt= 3,000,000*10%+ 7,000,000*5%/ 10,000,000

= 300,000+350000/10,000,000

=650,000/10,000,000

= 6.5%

Average accumulated expenditure for 2019

Jan 1 ,2019= (500,000+600,000+400,000+28,167)*3/3

= 1,528,167

Jan 30= 550,000*2/3

= 366,667

Total= 1,528,167+ 366,167

= 1,894,334

Interest rate capitalized in 2019= $1,894,334*5.5%*4/12

= 34,729