Question

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:January 1, 2021 $290,000 September 1, 2021 $408,000 December 31, 2021 $408,000 March 31, 2022 $408,000 September 30, 2022 $290,000 Kendall borrowed $786,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,680,000 in 9% bonds payable outstanding in 2021 and 2022.Interest capitalized for 2021 was:__________

Answer 1

Answer:

Interest capitalized for 2021 was $51,120.

Explanation:

To calculate this, we use the weighted-average method of calculating capitalized interest which is calculated as the multiplication of interest rate and the sum of the weight of each expenditure based on the number of months within a year. This can be stated mathematically as follows:

Therefore, the interest capitalized for 2021 can be calculated as follows:

Weighted expenditure from January 1, 2021 to December 31, 2021 = $290,000 * (12 months / 12 months) = $290,000.

Weighted expenditure from September 1, 2021 to December 31, 2021 =$408,000 * (4 months / 12 months) = $136,000.

Weighted expenditure from December 31, 2021 to December 31, 2021 = $408,000 * (0 months / 12 months) = $0.

Sum of weighted expenditure for for 2021 = $290,000 + $136,000 + $0 = $426,000

Interest capitalized for 2021 = Sum of weighted expenditure for for 2021 * Interest on construction loan = $426,000 * 12% = $51,120

Therefore, interest capitalized for 2021 was $51,120.