Question

On December 31, 2016, Marin Inc. borrowed $4,500,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $540,000; June 1, $900,000; July 1, $2,250,000; December 1, $2,250,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding
10-year, 13% bond, December 31, 2010, interest payable annually $6,000,000
6-year, 10% note, dated December 31, 2014, interest payable annually $2,400,000
2. March 1, 2017, expenditure included land costs of $225,000
3. Interest revenue earned in 2017
$73,500

Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

The amount of interest _________

Answer 1

Answer:

$274,500

Explanation:

*March 1 : Amount spent = 540,000;  Period = 10

Weighted average accumulated expenditure = (10/12)*540000= 450,000

*June 1: Amount spent = 900,000;  Period = 7

Weighted average accumulated expenditure = (7/12)*900000= 525,000

*July 1: Amount spent = 2,250,000;  Period = 6

Weighted average accumulated expenditure = (6/12)*2250000= 1,125,000

*December 1: Amount spent = 2,250,000;  Period = 1

Weighted average accumulated expenditure = (1/12)*2250000= 187,000  

Therefore total Weighted average accumulated expenditure = 2,287,500

Interest on weighted average = 12%  *  2,287,500  = 274,500 = Avoidable interest

Calculation of Actual interest on the instruments;

Bond: 13%*6,000,000= 780,000

Note: 10%*2,400,000= 240,000

Loan: 12%*4,500,000= 540,000

Actual interest = 1,560,000

According to GAAP; The least amount between Actual Interest and Avoidable interest can be capitalized.

Following the figures above, amount of interest to be capitalized in 2017 in relation to the construction of the building is $274,500