Question

Thornton Industries began construction of a warehouse on July 1, 2018. The project was completed on March 31, 2019. 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% bonds Construction expenditures incurred were as follows: July 1, 2018 $ 400,000 September 30, 2018 600,000 November 30, 2018 600,000 January 30, 2019 540,000 The company’s fiscal year-end is December 31. Required: Calculate the amount of interest capitalized for 2018 and 2019.

Answer 1

Answer:

2018 $21,600

2019 $4,320

Explanation:

We need to work out average cost of borrowing as follows;

$2,000,000*8%+$8,000,000*4%=$480,000

$480,000/(2,000,000+8,000,000)=4.8%

July1, 2018    $400,000*4.8%*6/12=$9,600

Sept 30,2018  $600,000*4.8%*3/12=$7,200

Nov. 30, 2018  $600,000*4.8%* 2/12=$4,800

Total interest to be capitalized in December 31, 2018 =$21,600

Total interest to be capitalized in December 31 2018$540,000*4.8%*2/12=$4,320