Question

On January 2, 2021, the Pilgrim Enterprise began construction of a building to be used as its office headquarters. The building was completed on December 31, 2021. Expenditures on on construction were as follows:

Date	Expenditure
January 2, 2021	$1,000,000
March 1	960,000
July 1	600,000
December 31	240,000

On January 2, 2021, the company obtained a $2 million construction loan with a 6% interest rate. In addition, the company has a $2.5 million general purpose bond with a 7% interest rate. The company’s fiscal year-end is December 31.

Required

Calculate the amount that Pilgrim should report as Building on its December 31, 2021 balance sheet and Interest Expense on its income statement for the year ending December 31, 2021. Your work should include calculations of weighted average capital expenditures, avoidable interest and actual interest.

Answer 1

	Total cost incurred	2,800,000
Add:	Avoidable Interest	130,500
	Building on its December 31, 2021	2,930,500
	Actual interest paid	295,000
Less:	Avoidable Interest	130,500
	Interest Expense on its income statement	164,500

Date	Expenditures	Mulatiply: Period in Fraction	Weighted-Average
January 2,	1,000,000	12/12	1,000,000
March 1	960,000	10/12	800,000
July 1	600,000	7/12	350,000
December 31	240,000	0/12	-
Total cost incurred	2,800,000
Weighted-Average Accumulated Expenditures			2,150,000
	Weighted-Average Accumulated Expenditures	Applicable Interest rate	Avoidable Interest
Full amount	2,000,000	6%	120,000
2150000-2000000	150,000	7%	10,500
	2,150,000		130,500
Avoidable Interest			130,500
Debt type	Interest rate	Amount	Remarks
Construction loan	6%	120,000	2000000*6%
General purpose bond	7%	175,000	2500000*7%
Actual interest paid		295,000