Question

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $570,000; March 31, $670,000; June 30, $470,000; October 30, $810,000. To help finance construction, the company arranged a 10% construction loan on January 1 for $840,000. The company’s other borrowings, outstanding for the whole year, consisted of a $4 million loan and a $6 million note with interest rates of 14% and 10%, respectively.
 
Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. 0.1234 should be entered as 12.34%).)
  

Answer 1

Date	Expenditure		Weight
1-Jan	$570,000	x	12/12	=	$570,000
31-Mar	$670,000	x	9/12	=	$502,500
30-Jun	$470,000	x	6/12	=	$235,000
30-Oct	$810,000	x	2/12	=	$135,000
Accumulated expenditure	$2,520,000				$1,442,500

Average accumulated expenditure	Average		Interest Rate			Capitalized Interest
	$840,000		10	%	=	$84,000
	$602,500		*11.6	%	=	$69,890
	$1,442,500					$153,890

Computation of average interest rate

Other Borrowings	Average		Interest Rate			Capitalized Interest
	$4,000,000		14	%	=	$560,000
	$6,000,000		10	%	=	$600,000
	$1,160,000					$1,160,000

Average interest rate = $1,160,000/$1,160,000 x 100 = 11.6%