Alta Company is constructing a production complex that qualifies for interest capitalization. The following information is...

Alta Company is constructing a production complex that qualifies for interest capitalization. The following information is available:

Capitalization period: January 1, 2019, to June 30, 2020
Expenditures on project:

2019:

January 1 $ 516,000

May 1 549,000

October 1 492,000

2020:

March 1 1,512,000

June 30 600,000
Amounts borrowed and outstanding:
   $1.4 million borrowed at 12%, specifically for the project
   $5 million borrowed on July 1, 2018, at 14%
   $18 million borrowed on January 1, 2017, at 8%

Required:

Note: Round all final numeric answers to two decimal places.

Compute the amount of interest costs capitalized each year.

Capitalized interest, 2019 $ fill in the blank 1

Capitalized interest, 2020 $ fill in the blank 2
If it is assumed that the production complex has an estimated life of 25 years and a residual value of $0, compute the straight-line depreciation in 2020.
$ fill in the blank 3
Since GAAP requires accrual accounting, if a company capitalizes interest during the construction period it will report _________ income than if it had not capitalized interest. In future periods, the same company will report ________ income than if it had not capitalized interest.

Expert Solution

SOLUTION:

Answer to Question 1.

Analysis of expenditure			Amonut in ($)

Date	Expenditure	Amount Allocated to Specific Borrowing	Amount Allocated to General Borrowing
2019
01.01.2019	516,000	516,000	-
01.05.2019	549,000	549,000	-
01.10.2019	492,000	335,000	157,000
	1,557,000	1,400,000	157,000
2020
01.03.2020	1,512,000		1,512,000
30.06.2020	600,000		600,000
	2,112,000	-	2,112,000

Weighted Average Borrowing ROI
Amount Borrowed	Proportionate Share	ROI	Weighted ROI
18,000,000	0.78	8.00%	6.24%
5,000,000	0.22	14.00%	3.08%
23,000,000.00	1.00
Weighted Average Rate of Interest on General Borrowing			9.32%


Borrowing Cost to be Capitalized in 2019
2019
		Calculation
Specific Borrowing			-
01.01.2019	516,000	(516,000x12%)	61,920
01.05.2019	549,000	(549,000x12%x8/12)	49,920
01.10.2019	335,000	(335,000x12%x3/12)	10,050

General Borrowing
01.10.2019	157,000	(157,000x9.32%x3/12)	3,658.10
Total Interest Capitalized			125,548.10

Borrowing Cost to be Capitalized in 2020
2020
Specific Borrowing (Outstanding As on 01.01.2020)	1,400,000	(1,400,000x12%x6/12)	84,000
General Borrowing			-
Outstanding on 01-01-2020	157,000	(157,000x9.32%x6/12)	7,316.20
Expend on 01.03.2020	1,512,000	(1,512,000x9.32%x4/12)	46,972.80
Expend on 30.06.2020	600,000	(600,000x9.32%x0/12)	-
Total Interest Capitalized			138,289

Answer to Question 2.

Depereciation on Complex ( Under Straight Line Method)
(As the Question remain silent about the when the asset is available for use so iit hass been assumed that Complex is available for used from 01-07-2020)
Value Of Complex
Amount Expanded
2019
01.01.2019	516,000
01.05.2019	549,000
01.10.2019	492,000

2020
01.03.2020	1,512,000
30.06.2020	600,000
		3,669,000
Interest Capitalised
2019	125,548.10
2020	138,289.00	263,837.10

Total Value Complex Capitalised		3,932,837.10
Less: Residual Value		-
		3,932,837.10
Depreciation (from 01-07-2020 to 31-12-202) (Devided by 50)
For 6 month under SLM method( Use ful life 25 yrs)		76,656.74

ekkarill92 answered 8 months ago

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