In: Accounting

# On March 1, 2010, Packard Company purchased land for an office site by paying $600,000 cash.... 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 $300,000, 13%, 10-year note payable dated July 1, 2009. Neither of these notes were paid off prior to their respective maturity dates. The amount of interest cost to be capitalized by Packard during 2011 is ## Solutions ##### Expert Solution  Calculation of Average Accumulated Expenditures:- Date Expenditure Weight Average March 1, 2011$       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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