Question

Early in 2010, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2010 and was completed on December 31, 2010. Dobbs made the following payments to Kiner, Inc. during 2010: Date Payment June 1, 2010 $3,600,000 August 31, 2010 5,400,000 December 31, 2010 4,500,000 In order to help finance the construction, Dobbs issued the following during 2010: 1. $3,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2010, with interest payable annually on May 31. 2 1.600,000 shares of no-par common stock, issued at $10 per share on Osteber 2010. In addition to the 9% bonds payable, the only debt outstanding during 2010 was a $750,000, 12% note payable dated January 1, 2006 and due January 1, 2016, with interest payable annually on January 1. Instructions Compute the amounts of each of the following (show computations) 1. Weighted average accumulated expenditures qualifying for capitalization of interest cost. 2. Avoidable interest incurred during 2010. 3. Total amount of interest cost to be capitalized during 2010.

4. total interest to be capitalize during 2010

Answer 1

Part 1

Date	Capitalization expenditures	period	Weighted-Average accumulated expenditures
June 1	3600000	7/12	2100000
August 31	5400000	4/12	1800000
December 31	4500000	0	0
			3900000

Part 2

Weighted-Average accumulated expenditures	Appropriate interest rate	Avoidable interest
3000000	9%	270000
900000	12%	108000
$3900000		$378000

Part 3

Actual interest incurred during 2010:

9% bonds payable, $3,000,000 × .09 × 7/12	157500
12% note payable, $750,000 × .12	90000
Actual interest	$247500

The interest cost to be capitalized is $247500 (the lesser of the $378,000 avoidable interest and the $247500 actual interest cost)