Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $1,850,000 at 10% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021:

$4,000,000, 14% bonds

$1,000,000, 10% long-term note

Construction expenditures incurred during 2021 were as follows:

January 1	$	800,000
March 31		1,400,000
June 30		1,040,000
September 30		800,000
December 31		600,000

Required:
Calculate the amount of interest capitalized for 2021 using the specific interest method.

Answer 1

Answer

Calculation of Weighted average Interest rate of all other debts.

Debt	Amount	Interest Rate	Interest Amount
Bond	$40,00,000	14%	$5,60,000
Long term note	$10,00,000	10%	$1,00,000
Total	$50,00,000		$6,60,000

Weighted average Interest rate of all other debts = (Total Interest / Total Debt) x 100

= ($6,60,000 / $50,00,000) x 100

= 13.20%

Calculation of Interest Capitalized for 2021:

Date	Amount	Capitalization Period	Weight Average Accumulated expenditures
January 1	$8,00,000	12/12	$8,00,000
March 31	$14,00,000	9/12	$10,50,000
june 30	$10,40,000	6/12	$5,20,000
September30	$8,00,000	3/12	$2,00,000
December 31	$6,00,000	0/12	$0
Total	$46,40,000		$25,70,000

Capitalized Interest:

Average Accumulated expenditures = $25,70,000

Interest on construction loan = $18,50,000 x 10% = $1,85,000

Interest on other debt = $7,20,000 x 13.20% = $95,040

Total Interest Capitalized in 2021 = $1,85,000 + $95,040 = $2,80,040