Question

On March 1, 2010, Packard Company purchased land for an office site by paying $600,000 cash. Packard began construction on the office building one year later on March 1, 2011. The following expenditures were incurred for construction on each of the respective dates: Date Amount March 1, 2011 $680,000 April 1, 2011 $352,000 May 1, 2011 $450,000 June 1, 2011 $520,000 The office was completed and ready for occupancy on July 1. To help pay for construction, $400,000 of common stock was issued on March 1, 2011. The only debts outstanding during 2011 was a $150,000, 11%, 6-year note payable dated January 1, 2011 and a $300,000, 13%, 10-year note payable dated July 1, 2009. Neither of these notes were paid off prior to their respective maturity dates. The amount of interest cost to be capitalized by Packard during 2011 is

Answer 1

Calculation of Average Accumulated Expenditures:-
Date	Expenditure		Weight		Average
March 1, 2011	$       680,000	×	4/12	=	$226,667
April 1, 2011	$       352,000	×	3/12	=	$88,000
May 1, 2011	$       450,000	×	2/12	=	$75,000
June 1, 2011	$       520,000	×	1/12	=	$43,333
Accumulated Expenditure	$   2,002,000				$433,000
Calculation of Weighted average interest rate on debts for capiatlization purpose
	Amount of loan		Interest rate		Interest
	a		b		a*b
11%, 6-year note payable	$       150,000		11%		$                16,500
13%, 10-year note payable	$       300,000		13%		$                39,000
Total	$       450,000				$                55,500
Weighted average interest rate on debts for capiatlization purpose	=		$55,500	×	100
			$450,000
	=		12.33%
Calculation of The amount of interest cost to be capitalized by Packard during 2011:-
	Average		Interest rate		Capitalized Interest
Average Accumulated expenditures	$       433,000
Common Stock	$       400,000
Other Debts (433000-400000)	$         33,000	×	12.33%	=	$                   4,070
Total					$                  4,070

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