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In: Accounting

Use this information for the following two questions. Ship-Builders Co. began construction of a new cutter...

Use this information for the following two questions.

Ship-Builders Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on March 31, 2019. To help finance construction, Ship-Builders took out an $8,200,000, 2-year, 7% loan on January 1, 2018. Interest on the loan was to be paid annually at the end of each year and the principal at the end. Ship-Builders has no other outstanding interest-bearing debt. Ship-Builders made the following expenditures in conjunction with this construction project:

Date

Amount

2/1/2018

$

1,600,000

3/1/2018

650,000

4/1/2018

600,000

8/1/2018

1,100,000

10/1/2018

700,000

11/1/2018

800,000

3/1/2019

2,500,000

A-How much interest should Ship-Builders Co. capitalize in 2018?

B-How much interest should Ship-Builders Co. expense in 2018?

Solutions

Expert Solution

Total Interest for 2018 = 8,200,000 x 7% = 574,000

Date Amount Months Capitalized Amount
01-02-2018 1600000 11                 1,466,666.67
01-03-2018 650000 10                    541,666.67
01-04-2018 600000 9                    450,000.00
01-08-2018 1100000 5                    458,333.33
01-10-2018 700000 3                    175,000.00
01-11-2018 800000 2                    133,333.33
5450000                 3,225,000.00

So Interest to be Capitalixed = 3,225,000 x 7% = 225,750

Interest to be Expensed = 574,000 - 225,750 = 348,250

ekkarill92 answered 2 years ago
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