On January 1, 2018, the Highlands Company began construction on
a new manufacturing facility for its own use. The building was
completed in 2019. The company borrowed $1,500,000 at 10% on
January 1 to help finance the construction. In addition to the
construction loan, Highlands had the following debt outstanding
throughout 2018:
$8,000,000, 15% bonds | |
$2,000,000, 10% long-term note | |
Construction expenditures incurred during 2018 were as
follows:
January 1 | $ | 660,000 | |
March 31 | 1,260,000 | ||
June 30 | 872,000 | ||
September 30 | 660,000 | ||
December 31 | 460,000 | ||
Required:
Calculate the amount of interest capitalized for 2018 using the
specific interest method.
|
Expenditure | Weight | Average | |||
Jan-01 | $ 660,000 | * | 12/12 | = | $ 660,000 |
Mar-31 | $ 1,260,000 | * | 9/12 | = | $ 945,000 |
Jun-30 | $ 872,000 | * | 6/12 | = | $ 436,000 |
Sep-30 | $ 660,000 | * | 3/12 | = | $ 165,000 |
Dec-31 | $ 460,000 | * | 12/12 | = | 0 |
Accumulated expenditure | $ 3,912,000 | $ 2,206,000 | |||
Average | Interest rate | Capitalised interest | |||
Average accumulated expenditures | $ 2,206,000 | ||||
Construction loan | $ 1,500,000 | * | 10% | = | $ 150,000 |
Other loans(not construction) | $ 706,000 | * | 14% | = | $ 98,840 |
$ 248,840 | |||||
Working | |||||
Loan Amount | Interest rate | Amount | |||
8000000 | 15% | 1200000 | |||
2000000 | 10% | 200000 | |||
10000000 | 1400000 | ||||
Average rate | 14.00% | ||||
1400000/10000000 |
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