Question

On June 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2016. Expenditures on the project were as follows ($ in millions): July 1, 2015 54 October 1, 2015 22 February 1, 2016 30 April 1, 2016 21 September 1, 2016 20 October 1, 2016 6 On July 1, 2015, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2016. 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 2015 and 2016. The company's fiscal year-end is December 31.
What is the amount of interest that Crocus should capitalize in 2016, using the specific interest method (rounded to the nearest thousand dollars)?

Answer 1

Answer:

$7,117,000

Explanation:

There is some information missing that I looked up, hopefully the numbers are the same, but if not you can adjust them.

Weighted average expenditures:

July 1, 2015, $54  million

October 1, 2015, $22  million

February 1, 2016, $30  million

April 1, 2016, $21 million

September 1, 2016, $20  million

October 1, 2016, $6 million

we must first determine the amount of interest for 2015:

[($54 x 6/6) + ($22 x 3/6)] x 6% / 6/12 = $1.95 million

weighted average expenditures 2016:

• ($54 + $22 + $1.95 = $77.95) x 10/10 = $77.95
• $30 x 9/10 = $27
• $21 x 7/10 = $14.7
• $20 x 2/10 = $4
• $6 x 1/10 = $0.6
• total $124.25 million

interests:

• $70 x 6% x 10/12 = $3,500,000
• ($124.25 - $70) x 8% x 10/12 = $3,617,000 (rounded to nearest thousand)
• Total = $7,117,000