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On January 1, 2018, Star Inc. began construction of a new warehouse for its own use....

On January 1, 2018, Star Inc. began construction of a new warehouse for its own use. The warehouse was completed in 2019. Expenditures on the project in 2018 were as follows:

            January 1, 2018           $310,000

            March 31, 2018           $600,000

            September 1, 2018      $720,000

Star borrowed $600,000 on a construction loan at 6% interest rate on January 1, 2018. The loan was outstanding throughout the construction period. During 2018, the company had $300,000 in 4% bonds and $700,000 in 8% notes outstanding. Star’s capitalized interest in 2018 using the specific interest method was:

A. $60,000.

B. $63,200.

C. $68,000.

D. $104,000.

Solutions

Expert Solution

Answer is B)$ 63,200

Accumulated expenses
January 1, 2018 (310000*12/12)                  3,10,000
March 31, 2018   (600000*9/12)                  4,50,000
September 1, 2018 (720000*4/12)                  2,40,000
Accumulated expenses                10,00,000
Weighted Average Rate Interest
Bond (300000*4%)                      12,000
Notes (700000*8%)                      56,000
                     68,000
Total Interest / Total Loan amount *100
68000 / 1000000 *100 6.80%
Capitalisation
Construction Loan(600000 * 6%)                      36,000
Accumulated Expenses *Weighted Average Rate
1000000 - 600000)*6.80                      27,200
Total Capitalisation expenses                      63,200

ekkarill92 answered 1 year ago
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