Question

On January 2, 2020, Vaughn Manufacturing began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2021. Expenditures for the construction were as follows:
January 2, 2020 $ 599000
September 1, 2020 1801200
December 31, 2020 1801200
March 31, 2021 1801200
September 30, 2021 1220000
Vaughn Manufacturing borrowed $3230000 on a construction loan at 10% interest on January 2, 2020. This loan was outstanding during the construction period. The company also had $13680000 in 7% bonds outstanding in 2020 and 2021.
The interest capitalized for 2020 was:
a. $159600
b. $479060
c. $478800
d. $119940

Answer 1

Answer:

d. $119,940

Explanation:

We must first calculate the weighted accumulated expenditures 2020:

• January $599,000 x 12/12 = $599,000
• September $1,801,200 x 4/12 = $600,400
• December $1,801,200 x 0/12 = $0
• total = $1,199,400

capitalizable interests = $1,199,400 x 10% (interest rate of specific construction loan) = $119,940

you will consider other interest rates only if expenses are higher than the specific construction