Question

On December 31, 2019, Sarasota Inc. borrowed $3,960,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $475,200; June 1, $792,000; July 1, $1,980,000; December 1, $1,980,000. The building was completed in February 2021. Additional information is provided as follows.

1.		Other debt outstanding
		10-year, 14% bond, December 31, 2013, interest payable annually		$5,280,000
		6-year, 11% note, dated December 31, 2017, interest payable annually		$2,112,000
2.		March 1, 2020, expenditure included land costs of $198,000
3.		Interest revenue earned in 2020		$64,680

(a)

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Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

The amount of interest

$

Answer 1

Solution

Year 2020	Amount	Month	Average Investment (Amount * Month)
March	$475,200	10/12.	$396,000
June	$792,000	7/12.	$462,000
July	$1,980,000	6/12.	$990,000
December	$1,980,000	1/12.	$165,000
			$2,013,000
Notes
During construction, interest on land expenditure is capitalised to building cost not land
Average Investment	Interest Rate	Avoidable Interest Cost (Avg Investment * Interest Rate)
$2,013,000	13%	$261,690
Loans	Amount	Issued	Actual Interest Cost
13% to finance construction	$3,960,000	Dec 31,2019	$514,800	(3960000 * 13%)
14% Bond	$5,280,000	Dec 31,2013	$739,200	(5280000 * 14%)
11% Note	$2,112,000	Dec 31,2017	$232,320	(2112000 * 11%)
			$1,486,320
Capitalisation of Interest at Dec 31, 2020
$261,690
Interest Expense at Dec 31, 2020
$1486320 - $261690
$1,224,630

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