Question

On December 31, 2019, Ayayai Inc. borrowed $3,720,000 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, $446,400; June 1, $744,000; July 1, $1,860,000; December 1, $1,860,000. 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 $4,960,000 6-year, 11% note, dated December 31, 2017, interest payable annually $1,984,000 2. March 1, 2020, expenditure included land costs of $186,000 3. Interest revenue earned in 2020 $60,760 (a) Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

Answer 1

Computation of the average Investment for the 2020 expenditure;

Expenditure in 2020	Amount	Period in 2020	Weighted Investment
March 1.	$446,400	=10/12	$372,000
June 1.	$744,000	=7/12	$434,000
July 1.	$1,860,000	=6/12	$930,000
Dec 1.	$1,860,000	=1/12	$155,000
		Average Investment	$1,891,000

Computation of the Total Interest expenditure in 2020 :

Loan Amount	Amount	Interest Rate	Issue date	Interest Exp in 2020
12% Specific Loan	$3,720,000	13%	12/31/2019	$483,600
13% Bond	$4,960,000	14%	12/31/2013	$694,400
10% Note	$1,984,000	11%	12/31/2017	$218,240
		Total Interest 2020		$1,396,240

Interest to be capitalized to Building in 2020 = Average Investment *Interest Rate = $1,891,000*13% = $245,830

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