Question

8 of 10 Keiron Industries began construction of a warehouse on July 1, year 1. The project was completed on March 31, year 2. No new loans were required to fund construction. Keiron does have the following two interest-bearing liabilities that were outstanding throughout the construction period: $3,000,000, 10% note $7,000,000, 5% bonds Construction expenditures incurred were as follows: July 1, year 1 September 30, year 1 November 30, year 1 January 30, year 2 $500,000 600,000 400,000 550,000 The company's fiscal year-end is December 31. Required: Calculate the amount of interest capitalized for year 1 and year 2

Answer 1

The period starts from July 1 Year 1 to March 31 Year 2. It means there are two accounting periods for interest computation as:

Year 1 = July 1 to Dec 31 = 6 months

Year 2 = Jan 1 to March 31 = 3 months

Computation of weighted average interest rate

	Principal	Interest
10% notes	3,000,000	300,000
5% bonds	7,000,000	350,000
	$       10,000,000	$ 650,000

Weighted average interest rate = 650,000/10,000,0000 = 6.5%

Computation of average accumulated expenditures for Year 1

	Details	Amount
July 1	500,000 * 6/6	500,000
Sep 30	600,000 * 3/6	300,000
Nov 30	400,000 *1/6	66667
Total	1500,000	866667

Interest to be capitalized in Year 1 = 866667 X 6.5% X 6 /12 = $ 28167

Computation of average accumulated expenditures for Year 1

	Details	Amount
Jan 1, Year 2	(1500,000+28167) X 3/3	1528,167
January 30	550,000 * 2/3	366667
		1894,834

Interest to be capitalized in Year 2 = 1894,834 X 6.5% X 3/12 = $ 30791