Question

On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 $ 334,000 September 1, 2021 $ 498,000 December 31, 2021 $ 498,000 March 31, 2022 $ 498,000 September 30, 2022 $ 334,000 Dreamworld had $6,600,000 in 12% bonds outstanding through both years. Dreamworld's capitalized interest in 2021 was:

Answer 1

Answer:

The correct answer is $60,000.

Explanation:

According to the scenario, the given data are as follows:

Expenditure for Jan.1 = $334,000

Time period ( Jan.1 - Dec.31 ) = 12 months

So, average expenditure = $334,000

Similarly, Expenditure for Sep.1 = $498,000

Time period ( Sep.1 - Dec.31 ) = 4 months

So, average expenditure = $498,000 × 4÷12 = $166,000

Now, Expenditure for Dec.31 = $498,000

Time period ( Dec.31 - Dec.31 ) = 0 months

So, average expenditure = $498,000 × 0÷ 12 = 0

So, capitalized interest = ( average expenditure Jan.1 + average expenditure Sep.1 + average expenditure Dec.31) × 12%

= ($334,000 + $166,000 + $0) × 12%

= $500,000 × 12%

= $60,000