Question

On December 31, 2016, Vaughn Inc. borrowed $3,360,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $403,200; June 1, $672,000; July 1, $1,680,000; December 1, $1,680,000. The building was completed in February 2018. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $4,480,000 6-year, 11% note, dated December 31, 2014, interest payable annually $1,792,000 2. March 1, 2017, expenditure included land costs of $168,000 3. Interest revenue earned in 2017 $54,880 Collapse question part (a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

a) The amount of interest $

Answer 1

ANSWER

a.

Expenditure
Mar-01	$      403,200	10/12	$                        336,000
Jun-01	$      672,000	7/12	$                        392,000
Jul-01	$   1,680,000	6/12	$ 840,000
Dec-01	$   1,680,000	1/12	$                        140,000
			$                     1,708,000
Loans		Issued	Actual interest cost
13% to finance construction	$   3,360,000	12/31/16	$                        436,800
14% bond	$   4,480,000	years ago	$ 627,200
11% bond	$   1,792,000	years ago	$                        197,120
			$                     1,261,120

Average investment = $1,708,000

Avoidable interest cost = $1,708,000* 13% = $222,040

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