Question

Interest During Construction Matrix Inc. borrowed $1,100,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2019, and was completed on October 31, 2019. Expenditures related to this building were: January 1 $258,000 (includes cost of purchasing land of $150,000) May 1 310,000 July 1 450,000 October 31 280,000 In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year. Required: 1. Compute the amount of interest capitalized related to the construction of the building. 2. If the expenditures are assumed to have been incurred evenly throughout the year: Compute weighted average accumulated expenditures Compute the amount of interest capitalized on the building

Answer 1

Answer 1 :-
Expenditure Portion Outstanding Weighted Average
Date	Amount(a)	{No. of month/12}(b)	Amount (a)*(b)(in $)
January 1st	258,000	10/12	215,000
May 1st	310,000	6/12	155,000
July 1st	450,000	4/12	150,000
October 31st	280,000	0/12	-
			520,000

Avoidable Interest = 520,000 * 8% =$41,600
Actual Interest :-
Amount	Rate	Interest(in $)
1,100,000	8%	88,000
500,000	9%	45,000
800,000	10%	80,000
Actual Interest		213,000
So in this case Avoidable interest is lower than actual interest thus $41,600 will be capitalized. Answer 2:- Weighted average accunulated expenditure = (258,000+310,000+450,000+280,000)/2 = $649,000 Answer 3:-

Amount of interest capitalized in building = (649,000*8%) = $51,920