In: Accounting
Tamarisk Inc. is a book distributor that had been operating in
its original facility since 1990. The increase in certification
programs and continuing education requirements in several
professions has contributed to an annual growth rate of 15% for
Tamarisk since 2015. Tamarisk’ original facility became obsolete by
early 2020 because of the increased sales volume and the fact that
Tamarisk now carries CDs in addition to books.
On June 1, 2020, Tamarisk contracted with Black Construction to
have a new building constructed for $5,600,000 on land owned by
Tamarisk. The payments made by Tamarisk to Black Construction are
shown in the schedule below.
Date |
Amount |
|
July 30, 2020 |
$1,260,000 |
|
January 30, 2021 |
2,100,000 |
|
May 30, 2021 |
2,240,000 |
|
Total payments |
$5,600,000 |
Construction was completed and the building was ready for occupancy
on May 27, 2021. Tamarisk had no new borrowings directly associated
with the new building but had the following debt outstanding at May
31, 2021, the end of its fiscal year.
10%, 5-year note payable of $2,800,000, dated April 1, 2017, with interest payable annually on April 1. |
12%, 10-year bond issue of $4,200,000 sold at par on June 30, 2013, with interest payable annually on June 30. |
The new building qualifies for interest capitalization. The effect
of capitalizing the interest on the new building, compared with the
effect of expensing the interest, is material.
(a)
Compute the weighted-average accumulated expenditures on Tamarisk’s new building during the capitalization period.
Weighted-Average Accumulated Expenditures |
Following schedule calculates the weighted-average accumulated expenditures: | ||||||
Date | Expenditure | capitalisation period | Weight | Weighted expenditure | ||
a | b | c=b/12 | d=a*c | |||
30-Jul | $ 12,60,000.00 | 10 | 0.833 | $ 10,50,000 | ||
30-Jan | $ 21,00,000.00 | 4 | 0.333 | $ 7,00,000 | ||
30-May | $ 22,40,000.00 | 0 | 0.000 | $ - | ||
Total | $ 17,50,000 |