Question

Interest During Construction Dexter Construction Corporation is building a student condominium complex; it started construction on January 1, Year 1. Dexter borrowed $1 million specifically for the project by issuing a 10%, 5-year, $1 million note, which is payable on December 31 of Year 3. Dexter also had a 12%, 5-year, $3 million note payable and a 10%, 10-year, $1.8 million note payable outstanding all year. In Year 1, Dexter incurred costs as follows: January 1 $280,000 March 1 600,000 June 30 1,000,000 November 1 480,000 Calculate Dexter's capitalized interest on the student condominium complex for Year 1. Capitalized interest

Answer 1

Answer:

$140,500

Explanation:

first we must calculate the weighted average accumulated expenditures:

incurred costs as follows:

January 1: $280,000 x 12/12 = $280,000

March 1: $600,000 x 10/12 = $500,000

June 30: $1,000,000 x 6/12 = $500,000

November 1: $480,000 x 2/12 = $80,000

total = $1,360,000

now we must calculate the weighted average interest rate on the non construction debt:

12% x $3 million = $360,000

10% x $1.8 million = $180,000

total = $540,000 / ($3,000,000 + $1,800,000) = 11.25%

capitalized interest:

$1,000,000 x 10% (specific construction debt) = $100,000

$360,000 x 11.25% (non construction debt) = $40,500

total $140,500