Question

Lance Corp is self constructing a building. Construction began 3/1/19 and ended on 9/30/20. Lance borrowed$1,600,000 to help finance the project. Lance had other debt of $3million at 6% and $5 million at 9%. Costs on the building were incurred as follows: costs 3/1/2019 600,000.00 7/1/2019 1,200,000 .00 9/30/2019 12/31/2019 3/30/2020 9/30/2020 800,000.00 600,000.00 400,000.00 200,000.00 What is capitalized interest in 2019? What are total construction costs on 12/31/19 What is capitalized interest in 2020? What are total construction costs on 12/31/20

Answer 1

	Interest @ 6%	Interest @ 9%	Total
Debt	3,000,000	5,000,000
Interest for 2019 (10 months)	150,000	375,000	525,000
Interest for 2020 (9 months)	135,000	337,500	472,500
Note :- (1) Since construction started on 3/1/2019 we assume that the borrowings of debt was done on same date
(2) The construction was completed on 9/30/2020 so we assume that the borrowings was paid of on that date
(3) Since there is no information on interest rate on borrowings of $ 1,600,000 no interest can be computed or we
assume that the cost shown per month is inclusive of interest for borrowings of $ 1,600,000.
(4) The other debt of Lance is assumed that it was used for construction only as no detail on it is provided otherwise.
Solution 1
Since the construction is not completed as on 2019 any cost paid towards building it will have to be capitalized hence
interest paid on debt should also be capitalized.
Total interest to be capitalized for 2019 is $ 525,000
Solution 2
Total construction cost for 2019 is 3,725,000
Month	Cost
03/01/2019	600,000
07/01/2019	1,200,000
09/30/2019	800,000
12/31/2019	600,000
Interest cost	525,000
	3,725,000
Solution 3
Since the construction is not completed as on 2020 any cost paid towards building it will have to be capitalized hence
interest paid on debt should also be capitalized.
Total interest to be capitalized for 2020 is $ 472,500
Solution 4
Total construction cost for 2020 is 1,072,500
Month	Cost
03/30/2020	400,000
09/30/2020	200,000
Interest cost	472,500
	1,072,500