Question

On January 1, 2021, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2022. Construction expenditures for 2021, which were incurred evenly throughout the year, totaled $9,600,000. Marjlee had the following debt obligations which were outstanding during all of 2021:

Construction loan, 9% $2,400,000
Long-term note, 8% 3,200,000
Long-term note, 5% 6,400,000

Required:
Calculate the amount of interest capitalized in 2021 for the building using the specific interest method.

Answer 1

The amount of interest capitalized in 2021 for the building using the specific interest method is $360000.

The first thing to do is to calculate the average cost of borrowing which will be:

= ($3200000 × 8%) + ($6400000 × 5%) / $9,600,000

= ($256000 + $320000) / $9600000

= $576000 / $9600000

= 0.06 = 6%

The average expenditure during the year will be:

= $9600000/2.

= $4800000

The capitalized Interest will be:

= 9% × $2400000

= $216000.

Then, the capitalized Interest for the borrowing will be:

= 6% × $2400000

= $144000

The total capitalized Interest will be:

= $216000 + $144000

= $360,000

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