Question

On January 1, 2018, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The company borrowed $2,350,000 at 9% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2018: $7,000,000, 14% bonds $3,000,000, 9% long-term note Construction expenditures incurred during 2018 were as follows: January 1 $ 960,000 March 31 1,560,000 June 30 1,232,000 September 30 960,000 December 31 760,000 Required: Calculate the amount of interest capitalized for 2018 using the specific interest method. (Do not round the intermediate calculations. Round your percentage answers to 1 decimal place (i.e. 0.123 should be entered as 12.3%).)

Answer 1

Answer:

Highlands Company

The interest capitalized for 2018 using the specific interest method is:

= $268,740.

Explanation:

a) Data and Calculations:

Amount borrowed on January 1, 2018 = $2,350,000

Rate of interest for the construction loan = 9%

Outstanding debts throughout 2018:

$7,000,000, 14% bonds

$3,000,000, 9% long-term note

Construction Expenditures incurred during 2018:

Date                    Expenditure     Weight       Weighted Average

January 1             $ 960,000         12/12           $960,000

March 31              1,560,000           9/12            1,170,000

June 30               1,232,000           6/12              616,000

September 30      960,000            3/12             240,000

December 31        760,000            0/12                         0

Total accumulated weighted-average expenditure = $2,986,000

Interest capitalized for 2018 using the specific interest method:

= $268,740 ($2,986,000 * 9%)