Question

Phipps Inc. is a large scale bakery that had been operating in its original facility since 1980. On July 1, 2020, Phipps contracted with Cakes Construction to have a new bakery constructed for $2,000,000 on land owned by Phipps. The payments made by Phipps to Cakes Construction are shown in the schedule below: Date August 1, 2020 November 30, 2020 April 30, 2021 Amount $ 500,000 $ 840,000 $ 660,000 Construction was completed and the building was ready for occupancy on April 29, 2021. Phipps had no new borrowings directly associated with the new building but had the following debt outstanding at April 30, 2021, the end of its fiscal year. 8%, 10-year note payable of $1,000,000, dated January 1, 2017, with interest payable annually on December 31. 6%, 20-year bond issue sold at par on July 1, 2006 with interest payable annually on June 30. The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. a. Compute the Weighted Average Accumulated Expenditures b. Compute the interest which can be capitalized

Answer 1

Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
Date	Capitalization Expenditures	Period	Weighted-Average Accumulated Expenditures
8/1/20	$                            500,000.00	9/12	$                     375,000.00
11/30/20	$                            840,000.00	5/12	$                     350,000.00
4/30/21	$                            660,000.00	0/12	$                                   -
			$                     725,000.00
Avoidable interest incurred = $725,000 x 6.67%	$                              48,333.33
Actual interest incurred during 2017:
8% Notes payable, $1,000,000 × .08	$                              80,000.00
6%  Bond  payable, 2,000,000 × .06	$                            120,000.00
	$                            200,000.00
weighted-average rate = 200,000/$3,000,000	6.67%
Total actual interest cost	$                            200,000.00
Total  interest cost to be capitalized  (the lesser of the  48,333.33 avoidable interest and the $200,000 actual interest cost)	$                              48,333.33
Total interest expensed	$                            151,666.67