Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $2,200,000 at 8% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021:

$9,000,000, 10% bonds
$6,000,000, 8% long-term note

Construction expenditures incurred during 2021 were as follows:

January 1 $900,000
March 31 1,500,000
June 30 1,160,000
September 30 900,000
December 31 700,000

Required:
Calculate the amount of interest capitalized for 2016 using the specific interest method.

Answer 1

Answer:

$255,960

Explanation:

Weighted average expenses:

• January 1, $900,000  x 12/12 = $900,000
• March 31, $1,500,000  x 9/12 = $1,125,000
• June 30, $1,160,000  x 6/12 = $580,000
• September 30, $900,000  x 3/12 = $225,000
• December 31, $700,000 x 0/12 = $0

• total $2,830,000

average interest rate for general debt = ($9,000,000 x 10%) + ($6,000,000 x 8%) = $1,380,000

$1,380,000/$15,000,000 = 9.2%

interest expense:

specific debt = $2,200,000 x 9% = $198,000

general debt = $630,000 x 9.2% = $57,960

total capitalized interest = $255,960

Answer 2

Construction Exp

Jan 900,000 1 900,000

Mar 1,500,000 0.75 1,125,000

June 1,160,000 0.5 580,000

Sept 900,000 0.25 225,000

Dec 700,000 0 -

5,160,000 2,830,000

Weighted avg

900,000

480,000

1,380,000

interest on difference interest on construction

9.20% 8.0%

630,000 2,200,000

57,960 176,000.0

Amount capitalized 233,960.0