Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $1,500,000 at 8% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021: $5,000,000, 12% bonds $3,000,000, 8% long-term note Construction expenditures incurred during 2021 were as follows: January 1 $ 600,000 March 31 1,200,000 June 30 800,000 September 30 600,000 December 31 400,000 Required: Calculate the amount of interest capitalized for 2021 using the specific interest method

Answer 1

Answer: $177,750

Explanation:

January 1st  

Construction expenditure 600,000

outstanding interest   12/12= 1

Accumulated expenditure= 600,000

x1 = $600,000

March 31

Construction expenditure = 1,200,000

outstanding interest  9/12=3/4

Accumulated expenditure= 3/4x1,200,000=$ 900.000

June 30

construction expoenditure= 800,000

outstanding interest= 6/12=1/2

Accumulated expenditure= 1/2 x 800000= $400000

September 30

construction expenditure=600,000

outstanding interest=3/12

Accumulated expenditure- 1/4 x600,000=$150,000

December 31

Construction expenditure= 400,000

outstanding interest =0/12

Accumulated expenditure=0

Total of the average accumulated expenditure  =$2,050,000

Weighted average on other debts  

Bonds interest of  12% for $5,000,000= $600,000

Long term note = 8% for $3,000,000 =240,000

Total = $840,000

weighted average =$840,000/(3,000,000 + 5,000,000)

= 840,000/8,000,000= 10.5%

Amount of difference =average accumulated expenditure- construction loan

=$2,050,000- $1,500,000

=$550,000

Interest on difference =10.5/100 x $550,000

=$57,750

Interest on amount on construction loan= 8/100 x  $1,500,000

= $120,000

Amount of interest capitalized  = interest on construction loan + interest on amount obtained from difference of accumulated expenditure and construction loan = $120,000+ $57,750 = $177,750