Question

The information in this question is based on the previous question except that ABC Co. borrowed $1,500,000 and not $3,000,000 specifically for the construction of the complex. The facts are: ABC Co. would like to construct a new office complex. On January 1, 2017 ABC Co. borrowed $1,500,000 at 10% payable annually to finance the construction of the new complex. During 2017, ABC Co. made the following expenditures directly related to the construction project: April 1, $400,000 July 1, $1,800,000 October 1, $2,000,000 December 31, $1,000,000 The construction was completed in March, 2018. There were other debts outstanding during 2017 as follows: 10-year, 12% note payable, dated January 1, 2015. $2,000,000 5 year, 8%, $4,000,000 bond payable, January 1, 2010, interest payable annually. Determine the amount of interest to be capitalized in 2017 for the construction project

Answer 1

1. Calculate weighted average cost of capital for general funds

Fund	Amount	Int rate	Interest
1	2000000	12%	240000
2	4000000	8%	320000
Total	6000000		560000

Weighted average cost                  = 560000 / 6000000

                                                         9.33%

2. Calculate weighted average funds used

Date	Amount	Months	Weighted amount (amt * month /12)
1-Apr	400,000	9	300,000.00
1-Jul	1,800,000	6	900,000.00
1-Oct	2,000,000	3	500,000.00
Total	4,200,000		1,700,000.00

              (December not considered as it is 31st December)

3. Calculate interest -

      1.5 mio of 1.7 should be based on specific loan taken and the rest based on general cost                       

Loan	Amount	Rate	Interest
Specific	1500000	10	150000
General	200000	9.33	18660
Total	1700000		168660
Interest to be capitalized			168,660