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 $2,400,000 at 6% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021:
$8,000,000, 11% bonds
$2,000,000, 6% long-term note

Construction expenditures incurred during 2021 were as follows:

January 1 $980,000
March 31 1,580,000
June 30 1,256,000
September 30 980,000
December 31 780,000

Required:
Calculate the amount of interest capitalized for 2021 using the specific interest method.

Answer 1

Answer:

$207,800

Explanation:

Date          Expenditure   Weight    Average

January 1   $980,000        12/12       $980,000

March 31    $1,580,000      9/12        $1,185,000

June 30     $1,256,000      6/12        $628,000

Sept. 30     $980,000        3/12        $245,000

Dec. 31       $780,000        0/12        $0            

Total                                                   $3,038,000

Calculation of average interest rate for general debt

                              Amount     Rate     Interest

Bonds                 $8,000,000   11%     $880,000

Long term rate   $2,000,000   6%      $120,000

Total                    $10,000,000            $1,000,000

Average interest rate = $1,000,000 / $10,000,000

Average interest rate = 10%

Calculation of interest capitalized

Note: General debt = $3,038,000 - $2,400,000 = $638,000

                          Average         Interest rate  Capitalized interest

Specific debt   $2,400,000            6%                 $144,000

General debt   $638,000               10%                $63,800

Total                                                                        $207,800