Question

Question 4 Indigo Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Indigo since 2012 Indigo' original facility became obsolete by early 2017 because of the Increased sales volume and the fact that Indigo now carries CDs in addition to books. On June 1,2017, Indigo contracted with Black Construction to have a new building constructed for $5,120,000 on land owned by Indigo. The payments made by Indigo to Black Construction are shown in the schedule below. Amount July 30, 2017 $1,152,000 January 30,2018 1.920,000 May 30, 2018 2048,000 Total payments $5120.000 Date Construction was completed and the building was ready for occupancy on May 27,2018. Indigo had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year 10%, 5-year note payable of S2560000, dated April 1, 2014, with interest payable annually on April 1. 12%, 10-year bond issue of $3,840,000 sold at par on June 30, 2010, with interest payable annually on June 30. | The new building qualifes for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Compute the weighted-average accumulated expenditures on Indigo's new building during the capitalization perlod Weighted-Average Accumulated Expenditures $ Compute the avoidable interest on Indigo's new building. (Round intermediate percentage calculation to 1 decinal place eg 156% and final answer to O decimal places, eg. 5,125) Avoidable Interest Some interest cost of Indigo Inc. Is capitalized for the year ended May 31,2018.Compute the amount of each ltems that must be disclosed in Indigo's financial statements Total actual interest cost $ Total Interest capitaized Total interest expensed $ Attempts: 0 of 5 used Save for Later Check Answer

Answer 1

	Cost of Contract	$5,120,000
	Payment schedule
	Date	Amount
	30-Jul-17	$1,152,000
	30-Jan-18	1920000
	30-May-18	2048000
	Total	$5,120,000
A)	Weighted Average Accumulated Expenditure helps a company identify what
	actual amount of interest it needs to capitalize while arriving at correct amount
	of self constructed Assets such as Building etc.
	Capitalization period specifies the number of months an amount of payment
	remained financed from any specific or General Borrowing
	Capitalization period is thus used as weights
	Weighted Average Accumulated Expenditure
				Weighted Average
	Date	Amount	Capitalisation period	Accumulated Expenditure
	30-Jul-17	$1,152,000	= 10/12	960000
	30-Jan-18	1920000	= 4/12	640000
	30-May-18	2048000	= 0/12	-
	Total	$5,120,000		1600000
B)	Calculation of Actual and Avoidable Interest
	General Debt
		Amount	Rate	Interest
	5 years Note	2560000	10%	256000
	10 Year Bond	3840000	12%	460800
	Total	6400000		716800
	Weighted average interest rate on general debt
	= Total Interest / Total Borrowing
	= 716800 / 6400000
	= 11.20 %
	This Interest rate is used to calculate the amount of interest that needs to be capitalized on Asset being build
	Calculation of Avoidable Interest
	Accumulated Expenditure	Interest Rate	Avoidable Interest
	1600000	11.20%	179200
	Avoidable interest specifies amount of interest to be capitalized on Asset
C)
	Total Actual Interest Cost	716800
	Total Interest Capitalized	179200
	Total Interest Expensed	537600
	= Interest Cost - Interest Capitalized
	= 716800 - 179200