Question

Computing and Recording Interest Capitalization The following information is from Bowin inc. for a long-term construction project that is expected to be completed in January 2021. The construction project is for a building intended for the company's own use. The capital expenditure on January 1, 2020, is for the purchase of land for the building site. No new construction loans were opened for the project in 2020. All debt was outstanding for the full year. Capital Expenditures for 2020 Date Amount Jan 1, 2020 $36.000 Mar 31, 2020 1,050.000 June 30, 2020 2.160.000 Nov. 30, 2020 100.000 oddns De Outstanding Debt in 2020 Debt Amount interest Rate Note payable 51.200.000 Note payable 960.000 Bond payable 2.400.000 10 Note payable 600 000

Answer 1

a.	Weighted average accumulated expenditure:
	Date	Amount	Period till the end of year	Weighted average expenditure
	Jan. 1	36000	12	36000*(12/12)=$ 36000
	Mar 31.	1080000	9	1080000*(9/12)=$ 810,000
	June 30.	2160000	6	2160000*(6/12)=$ 1080000
	Nov 30.	1080000	1	1080000*(1/12)=$ 90000
	Total			2016000
	Weighted average accumulated expenditure= $ 2016000
	Weighted average interest rate:
	Debt	Principal	Interest expense
	8% note	1200000	96000
			(1200000*8%)
	8% note	960000	76800
			(960000*8%)
	10% bond	2400000	240000
			(24000000*10%)
	9% note	600000	54000
			(600000*9%)
	Total	5160000	466,800
	Weighted average interest rate=Total interest expense/Total principal=466800/5160000=0.090465=9.0465%
	Interest to be capitalized=Weighted average accumulated expenditure*Weighted average interest rate=2016000*9.0465%=$ 182377
	Interest to expense=Total interest expense-Interest to be capitalized=466800-182377=$ 284,423
b.	Account name					Dr.	Cr.
	Land					36000
	Construction in process		(1080000+2160000+1080000+182377)			4502377
	Interest expense					284423
	Cash and payables						4822800
c.	Account name					Dr.	Cr.
	Depreciation expense					150079
	Accumulated depreciation						150079
	Depreciation expense=Cost of building/Useful life=4502377/30=$ 150079