Question

July 1, 2020 54 October 1, 2020 22 February 1, 2021 30 April 1, 2021 21 September 1, 2021 20 October 1, 2021 6 On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. 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 2020 and 2021. The company's fiscal year-end is December 31. What is the amount of interest that Crocus should capitalize in 2020, using the specific interest method

Answer 1

Based on the expenditure in 2020 and the relevant interest rate, the amount of interest that should be capitalized is $1.95 million

The expenditure in 2020 should be weighted according to when it was incurred and then summed up.

July expense is left with 6 months till year end:

= 54 x 6/12 months

= $27 million

October expense:

= 22 x 3 / 12

= $5.5 million

The interest is then:

= 6% x (27 + 5.5)

= $1.95 million

In conclusion, the interest to be capitalized is $1.95 million.

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