Question

Q3. (25 marks) Early in 2020, Qatar Corporation engaged Emirate Ltd. to design and construct a complete modernization of Qatar's manufacturing facility. Construction began on June 1, 2020 and was completed on December 31, 2020. Qatar made the following payments to Emirate Ltd. during 2020: Date Payment June 1, 2020$ 3,300,000 August 31, 20204,800,000 December 31, 20204,000,000 In order to help finance the construction, Qatar issued the following during 2020: 1.$ 2,000,000, ten-year, 9% bonds payable, issued at par on May 31, 2020, with interest payable annually on May 31, 2.1,000,000 common shares, issued at $10 per share on October 1, 2020. In addition to the 9% bonds payable, the only other debt outstanding during 2020 was a $ 700,000, 12% note payable dated January 1, 2019, and due January 1, 2022, with interest payable annually on January 1. Instructions Calculate the amounts of each of the following (show calculations): a) weighted average accumulated expenditures qualifying for capitalization of interest cost, b) avoidable interest incurred during 2020, c)total amount of interest cost to be capitalized during 2020,

Answer 1

1)

Weighted average accumulated expenditure

Date	Amount	Capitalization period	Weighted average accumulated expenditure
01, June, 2020	$3300000	7/12	$1925000
31, August, 2020	$4800000	4/12	$1600000
31, December, 2020	$4000000	0	$0
Total	$12100000		$3525000

2)        

Computation of avoidable interest incurred

Debt	Weighted average accumulated expenditure	Interest rate	Avoidable interest
From 9% bond	$2000000	9%	$180000
From 12% note	$700000	12%	$84000
total	$2700000		$264000

3)

            Actual interest incurred during 2020

            9% bonds payable, $2000000*9%*7/12 = 105000

            12% note payable, $700000*12%        = 84000

                                                                        = 189000

Total amount of interest cost to be capitalised for 2020 (lower of actual interest or avoidable interest) $189000