On January 1, 2021, the Marjlee Company began construction of anoffice building to be used...
On January 1, 2021, the Marjlee Company began construction of an
office building to be used as its corporate headquarters. The
building was completed early in 2022. Construction expenditures for
2021, which were incurred evenly throughout the year, totaled
$7,200,000. Marjlee had the following debt obligations which were
outstanding during all of 2021:
| Construction loan, 10% | $ | 1,800,000 | |
| Long-term note, 9% | 2,400,000 | ||
| Long-term note, 6% | 4,800,000 | ||
Required:
Calculate the amount of interest capitalized in 2021 for the
building using the specific interest method.
Homework Answers
Answer:
| Step 1: Figure out your average cost of borrowing = (24,00,000*0.09 + 48,00,000*0.06)/72,00,000 = 7% |
| Step 2: Figure out average expenditure during year = $72,00,000/2 = $36,00,000 |
| Step 3: Capitalized interest first eats up the specific construction loan so you had 10%*18,00,000 = $180,000 |
| Then the next 18,00,000 is at the average borrowing rate = 7%*18,00,000 = $126,000 |
| Total capitalized interest = $306,000 |
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On January 1, 2021, the Marjlee Company began construction of anoffice building to be used...
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