Question

Sylvester Co. takes out a 12% loan of $500,000 on 1/1/2014 to finance construction of a building for the company’s own use. Construction begins immediately, and $600,000 is spent on the construction at an even pace during 2014. Another $400,000 is spent at an even pace during 2015, with construction completed on 12/31/2015. No other construction loans are taken out. Sylvester incurred unrelated interest expenses of $10,000 and $15,000 in 2014 and 2015, respectively, on loans that bear interest at 10%. How much interest can Sylvester capitalize in 2014 and 2015?

Answer 1

Answer:

2014 36,000

205: 24,000

Explanation:

500,000 x 12% = 60,000 construction realted per year

Capitalize:

timeline:

<--/--/--/--/--/--/--/--/--/--/--/--/-->

each month the company is doing an spending related to the construction. We must capitalize based on the amount investment.

The first month capitalize throught the whole year,

the second month 11 months

the third for 10 months and so on.

Therefore, the capitalize amount will be half of the cost of the year

2014: interest capitalized through the cost of construction

600,000/2 x 12% = 36,000

400,000/2 x 12% = 24,000

That's the maximum amount we can capitalize for construction.