Question

On January 1, 2021, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2022. Construction expenditures for 2021, which were incurred evenly throughout the year, totaled $6,000,000. Marjlee had the following debt obligations which were outstanding during all of 2021: Construction loan, 10% $ 1,500,000 Long-term note, 9% 2,000,000 Long-term note, 6% 4,000,000 Required: Calculate the amount of interest capitalized in 2021 for the building using the specific interest method.

Answer 1

Answer:

$105,000

Explanation:

The computation of  interest capitalized in 2021 is shown below:-

Average cost of borrowing

= ($2,000,000 × 0.09 + $4,000,000 × 0.06) ÷ $6,000,000

= ($180,000 + $240,000) ÷ $6,000,000

= 7%

Average expenditure during year = $6,000,000 ÷ 2

= $3,000,000

Capitalized interest first eats up the specific construction loan

= 10% × $1,500,000

= $150,000

Therefore the next $1,500,000 is at the average borrowing rate = Construction loan × Average cost of borrowing

= $1,500,000 × 7%

= $105,000