Question

Capitalizing Interest

A) On April 1, PC Co. began construction of a small building. Payments of $250,640 were made monthly for four months beginning on April 1.

The building was completed and ready for occupancy on August 1. For the purpose of determining the amount of interest cost to be capitalized, calculate the weighted-average accumulated expenditures on the building.

B) OO Company purchased land as a factory site for $1340000. They paid $115000 to tear down two buildings on the land. Salvage (scrap) was sold for $8000. Legal fees of $5080 were paid for title investigation and making the purchase. Architect's fees were $46200. Title insurance cost $3500, and liability insurance during construction cost $3800. Excavation cost $15660. The contractor was paid $4400000. An assessment made by the city for pavement was $9900. Interest costs during construction were $256000.

The cost of the land that should be recorded by OO Company is ________

Answer 1

A)
Date	Payment	Capitalisation Period *	Average Payment
1st April	250640	4/4	250640
1st May	250640	3/4	187980
1st June	250640	2/4	125320
1st July	250640	1/4	62660
		Total	626600
* The number of months between the payment date and the date when interest capitalization ends.

B)
Cost of Land
Land	1340000
Cost incurred to tear
down buildings	115000
Legal fees	5080
Architet Fees	46200
Insurance cost	3500
Liability Insurance	3800
Excavation Cost	15660
Pavement Cost	9900
Interest	256000
Total Cost	1795140
Less:
Salvage value of scrap	-8000
Cost to be recorded	1787140

Note : Amount paid to contractor is not recorded as cost
All amounts directly related to the cost of an asset are capitalised, rebates
or scrap value is deducted from the cost of asset
Interest assumed to be capitalised portion, hence capitalised.