Question

Bob Company is constructing a building. Construction began on January 1 and was completed on December 31. Construction expenditures were $900,000 on April 1; $400,000 on June 30; $510,000 on September 1; and $120,000 on December 1. Bob Company borrowed $700,000 at 9% on January 1 to help finance construction of the building. In addition, the company had outstanding all year a 5%, 3-year, $100,000 note payable and a 6%, 2-year, $200,000 note payable.

Instructions

a) Determine the amount of interest costs to be capitalized.

b) Prepare the journal entry to be made at December 31 to record the interest capitalization.

Answer 1

Solution a:

Construction of Building - Bob Company
Schedule of Weighted-Average accumulated expenditure
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
1-Apr	$900,000.00	9/12	$675,000
30-Jun	$400,000.00	6/12	$200,000
1-Sep	$510,000.00	4/12	$170,000
1-Dec	$120,000.00	1/12	$10,000
	$1,930,000.00		$1,055,000

Weighted average interest rate on general borrowings = 5%*(100000/300000) + 6%*(200000/300000) = 5.67%

Total amount of interest to be capitalized = ($700,000*9%) + ($355,000*5.67%) = $83,129

Solution b:

Journal Entries - Bob Company
Date	Particulars	Debit	Credit
31-Dec	Building Dr	$83,129.00
	To Interest expense		$83,129.00
	(Being interest cost capitalized)