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Herr Inc. Has a fiscal year ending April 30. On May 1, of the previous year,...

Herr Inc. Has a fiscal year ending April 30. On May 1, of the previous year, Herr borrowed $10,000,000 al 15% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the current year ended April 30, expenditures for the partially completed structure totaled $ 6,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $ 400,000 for the year. How much should be shown as capitalized interest on Herr’s financial statement at April 30?

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Answer #1

Answer:-

The actual expenditure incurred on the partially completed structure = $ 6,000,000

Average actual expenditure = (0 + $ 6,000,000) / 2 = $3,000,000

Amount to be capitalized at April 30, 2018 = $3,000,000 * 15% = $450,000

As per SFAS 62, the interest earned is irrelevant to the question as interest earned on the un expended portion of the loan is not to be offset against the amount eligible for capitalization.

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