Question

6. On 3/1/19, Kepple Inc. borrowed funds on a 12%, two-year note, to finance the construction of a new warehouse which qualifies for interest capitalization. Construction on the project began on 4/1/19 and was completed on 11/1/19. Kepple has a calendar year-end. Rounded to the nearest whole month, over how many total months in 2019 should interest be capitalized under the current interest capitalization rules?

Answer 1

Answer:

The interest would be capitalized for 7 months time and must be calculated at 12% of the actual amount used for the construction of the new warehouse.    

Explanation:

The interest can only be capitalized for the period the loan amount was used to make the asset ready for use. Also note that the part of loan amount used will only be used to calculate the interest which would be capitalized which means if the company borrowed $1.2 million at 12% and used only $0.6 million of the total loan for construction of the building then the amount used will be $0.6 to compute the interest that will be capitalized.

The time period will be the corresponding time of commencement of construction and amount borrowed to the date the construction of the asset has been completed. So here, the time period for which the interest would be capitalized would be for 7 months (4/1/19 - 11/1/19) because the construction was completed within 7 months.