Question

9. On March 1, 2020, Bonita Industries purchased land for an office site by paying $2700000 cash. Bonita began construction on the office building on March 1. The following expenditures were incurred for construction: Date Expenditures March 1, 2020 $ 1700000 April 1, 2020 2490000 May 1, 2020 4590000 June 1, 2020 4890000 The office was completed and ready for occupancy on July 1. To help pay for construction, and purchase of land $3550000 was borrowed on March 1, 2020 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2020 was a $1580000, 12%, 6-year note payable dated January 1, 2020. Assume the weighted average accumulated expenditures for the construction project are $4400000. The amount of interest cost to be capitalized during 2020 is

Answer 1

Ans:

1.Weighted average expenditure=

[4,400,000*4//12]+[2,490,000*3/12]+[4,590,000*2/12]+[4,890,000*1/12]

                = 1,466,667+ 622,500+ 765,000+407,500

                   = $ 3,261,667

Note:

**Initial cost: 2,700,000 land+1,700,000 = 4,400,000

The construction is completed on july1 so expenditure will be capitalised only for period 1-Mar to-1 July out of total 12 months.

2 .Actual Interest cost incurred during 2020:

$35,50,000*9/100*10/12+1580,000*12/100*12/12=

=266,250+189,600

=455,850

3.

Amount of interest cost to be capitalized during 2020

=($3,550,000 × 9%) + ($850,000 ×12%) = $412,500