Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. 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 2021:
$7,000,000, 14% bonds
$3,000,000, 9% long-term note
Construction expenditures incurred during 2021 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 2021 using the specific interest method.

Answer 1

Answer:

$291,000

Explanation:

First, we need to calculate the weighted average expenditure. the Weighted average expenditure is calculated and attached with the answer in PDF format please find it.

Now calculate the Average interest rate on General debt

Average interest rate on General debt = [ ( $7,000,000 x 14% ) + ( $3,000,000 x 9% ) ] / ( $7,000,000 + $3,000,000 ) = [ $980,000 + $270,000 ] / $10,000,000 = $1,250,000 / $10,000,000 = 0.125 = 12.5%

Now the specific loan of $2,350,000 is utilised and the remianing value of expenditure is $636,000 ($2,986,000 - $2,350,000) fromgeneral debt is utilized for the costruction purpose. The interest on both loan should be capitalised.

Interest capitalized = ( $2,350,000 x 9% ) + ( $636,000 x 12.5% ) = $211,500 + $79,500 = $291,000

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