Question

Question 9 (1 point) On June 1, 2017, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2018. Expenditures on the project were as follows ($ in millions): 5 4 July 1, 2017 October 1, 2017 February 1, 2018 April 1, 2018 September 1, 2018 October 1, 2018 On July 1, 2017. Crocus obtained a $ 70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2018. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2017 and 2018. The company's fiscal year-end is December 31. What is the amount of interest that Crocus should capitalize in 2018. using the specific interest method (rounded to the nearest thousand dollars) $7,248,000 (rounded). $7.283.000 (rounded). $8.740.000 (rounded). None of these answer choices are correct

Answer 1

Solution:

Year 2017: Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Jul-17	$54,000,000	6/6	$54,000,000
1-Oct-17	$22,000,000	3/6	$11,000,000
Total	$76,000,000		$65,000,000
*Interest rate			6%
Interest capitalized in 2017			$1,950,000
Year 2018: Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Jan-18	$77,950,000	10/10	$77,950,000
1-Feb-18	$30,000,000	9/10	$27,000,000
1-Apr-18	$21,000,000	7/10	$14,700,000
1-Sep-18	$20,000,000	2/10	$4,000,000
1-Oct-18	$6,000,000	1/10	$600,000
Total	$154,950,000		$124,250,000

Year 2018: Interest Capitalized
Debt		Amount
70000000*6%*10/12 =		$3,500,000
(124250000- 70000000)*8%*10/12 =		$3,616,667
Total interest capitalized in 2018		$7,116,667

Hence last option "None of these answer choices are correct" is correct.