Question

During 2017, Barden Building Company constructed various assets at a total cost of $14,700,000. The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2017 were $9,800,000. The company had the following debt outstanding at December 31, 2017: a.10%, 5-year note to finance construction of various assets, dated January 1, 2017, with interest payable annually on January 1 $6,300,000 b.12%, ten-year bonds issued at par on December 31, 2011, with interest payable annually on December 31 7,000,000 c.9%, 3-year note payable, dated January 1, 2016, with interest payable annually on January 1 3,500,000 Instructions Compute the amounts of each of the following (show computations). 1.Avoidable interest. 2.Total interest to be capitalized during 2017.

Answer 1

Answer:

$  1,026,666.67

Explanation:

especific borrowings

$ 6,300,000 at 10% =  630,000.00   avoidable interest

remainder expenditures

9,800,000 - 6,300,000 = 3,500,000

We solve for the average interest rate:

average rate  

principal      rate interest

7,000,000 0.12 840000

3,500,000 0.1 350000

10,500,000  1190000

total interest / total principal  0.113333333

now we apply that rate for the remainder capitalized expendittures after constructed related interest

3,500,000 x 0.113333 = 396,666.67  

 

total interest capitalized  

630,000.00    + 396,666.67 =     1,026,666.67