Question

Culiver, Inc. is constructing a building that qualifies for interest capitalization. The following information is available:

Capitalization period: January 1, 2016-December 31, 2017 Expenditures on project (incurred evenly):

2016 $20,000

2017 $60,000

Amounts borrowed and outstanding (all debt incurred January 1, 2016):

$10,000 at 10% (specifically for the construction project)

$18,000 at 12% (general debt)

$30,000 at 14% (general debt)

Required:

• Compute the amount of interest that should be capitalized in 2016 and 2017. (Round interest rates to thenearest hundredths, e.g., 07.62%.)
• Assume that in 2016 unused borrowed funds were invested and earned interest revenue amounting to$600. How much interest should be capitalized to the asset account in 2017?

Answer 1

Answer a Interest that should be capitalized in 2016 and 2017 2016 $1,000 2017 $6,433 b The interest should be capitalized to the asset account in 2017 is $1,000 Explanations Calculation of Interest that should be capitalized in 2016 and 2017 2016 Weighted Average Accumulated Expenditures = ($0 + $20,000)/2 = $10,000 Capitalized Interest = $10,000 x 10% = $1,000 2017 Weighted Average Accumulated Expenditure = ($21,000+ $81,000)/2 = $51,000 Calculation of weighted average interest rate on other borrowings $18,000 12% = $2,160 $30,000 X 14% = $4,200 $48,000 $6,360 weighted Average Interest Rate on other borrowings = $6,360 / $48,000 = 13.25% Capitalized Interest $10,000 10% = $41,000 X 13.25% = $51,000 Capitalized Interest $1,000 $5,433 $6,433