Question

Thornton Industries began construction of a warehouse on July 1, 2016. The project was completed on March 31, 2017. No new loans were required to fund construction. Thornton does have the following two interest-bearing liabilities that were outstanding throughout the construction period:
- $2,000,000, 8% note

- $8,000,000, 4% note

Construction expenditures incurred were as follows:

- July 1, 2016 $400,000

- Sep 30, 2016 600,000

- Nov 30, 2016 600,000

- Jan 30, 2017 540,000

The company's fiscal year-end is December 31.

Required: Calculate the amount of interest capitalized for 2016 and 2017.

Answer 1

Answer:

THORNTON INDUSTRIES

AMOUNT OF INTEREST TO BE CAPITALIZED FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2017

2016

July 1 - Dec 31    $400,000 *4.8%*6/12 =  $9,600

Sep 30 - Dec 31  $600,000*4.8%*3/12 =   $7,200

Nov 30 - Dec 31  $600,000*4.8%*1/12 =     $2,400

Total Interest for 2016                                $19,200

2017

Jan 1 - Dec 31   $1,600,000*4.8% =             $76,800

Jan 30 - Dec 31   $540,000*4.8%*11/12 =     23,760

Total interest for the year 2017                  $100,560  

weightred average cost of capital =

    $2,000,000*8%   +     $8,000,000*4%

      $2,000,000 + $8,000,000

= 160,000  + 320,000

        10,000,0000

=$480,000 / 10,000,000 = 0.048 = 4.8%

Explanation:

Interest to be capitalized on construction expenditure will be interest on the amount borrowed to finance such construction. the interest will be from commencement of the construction to the cessation period