Question

On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions): July 1, 2020 64 October 1, 2020 32 February 1, 2021 40 April 1, 2021 26 September 1, 2021 25 October 1, 2021 11 On July 1, 2020, Crocus obtained a $80 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31. What is the amount of interest that Crocus should capitalize in 2021, using the specific interest method? (Enter your answers to nearest whole dollar amount.)

Answer 1

Answer :

$2.84 millions

Explanation :

Average expenditures for 2020

= [($58 million * 6 months / 6 months) + ($26 million * 3 months / 6 months)] = $71 millions

Amount of interest that Crocus should capitalize in 2020, using the specific interest method

= Average expenditures for 2020 * Interest rate * 6 months / 12 months

= $71 millions * 8 % * 6 months / 12 months

= $2.84 millions