Capitalize the lower amount. Interest earned on money invested is interest revenue. It does not affect the amount of interest ex
pensed or capitalized.Choice "c" is incorrect. Total expenditures of $250,000 must be divided by two to arrive at "average accumulated expenditures," since the expenditures were incurred evenly throughout the year. Failure to divide by two would result in an erroneous calculation ($25,000) for avoidable interest.Choices "b" and "a" are incorrect.
These answers assume avoidable interest is either $12,500 or $25,000 and then offsets this amount by the net the interest earned. Interest earned does not reduce interest expense or the amount capitalized.
At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year.
What amount of interest should Cann capitalize aspart of the cost of the plant addition?
a. $72,500
b. $132,000
c. $60,000
d. $140,000
