Question

On January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2017. Expenditures on the project were as follows:
January 1, 2016 $200,000
September 1, 2016 $300,000
December 31, 2016 $300,000
March 31, 2017 $300,000
September 30, 2017 $200,000

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2016 and 2017.

Interest capitalized for 2017 was ?

Answer 1

Answer:

$86,805

Explanation:

For computing the interest capitalized for 2017 we need to do following calculations

Average accumulated expenditures for year 2016 is

= (Jan 1 expenditure × number of months ÷ total number of months) + (Sep 1 expenditure × number of months ÷ total number of months) + (Dec 31 expenditure × number of months ÷ total number of months)

= (200,000 ×  12 ÷ 12) + (300,000 × 4 ÷ 12) + (300,000 ×  0 ÷ 12)

= 200,000 + 100,000 + 0

= $300,000

Now

Interest capitalized for 2016 was:

= (Jan 1 expenditure × number of months ÷ total number of months) + (Sep 1 expenditure × number of months ÷ total number of months) + (Dec 31 expenditure × number of months ÷ total number of months) × interest on construction loan

= (200,000 ×  12 ÷ 12) + (300,000 × 4 ÷ 12) + (300,000 ×  0 ÷ 12)  × 12%

= $300,000  × 12%

= 36,000

Now

Average accumulated expenditures for 2017 was:

Accumulated expenditure in 2016 is

= (Jan 1 expenditure + Sep 1 expenditure + Dec 1 expenditure + interest capitalized) × number of months ÷ total number of months

= (200,000 + 300,000 + 300,000 + 36,000) × 9 ÷ 9

= (836,000)  × 9 ÷9

= 836,000

And,

March 31, 2017 = 300,000  ×  6 ÷9 = 200,000

September 30, 2017 = 200,000  × 0 ÷ 9 = 0

So,

Average accumulated expenditures for 2017 was

= 836,000 + 200,000 + 0

= 1,036,000

Finally

Interest capitalized for 2017 was:

Specific borrowing is

= 750,000  ×  9 ÷ 12  × 12%

= 67,500

Therefore

Excess = (Accumulated expenditure in 2017) – (Total borrowing in 2016)

= (1,036,000 - 750,000) × number of months ÷ total number of months × bond payable discount

= 286,000 × 9 ÷ 12  × 9%

= 19,305

Hence,

Interest capitalized for 2017

= 67,500 + 19,305

= 86,805