Question

On January 1, 2017, James Airlines contracted with Sam Aircraft to construct an airplane to Jamess specifications at a cost of $2,500,000. During 2017, James paid Sam $400,000 on January 1, and another $450,000 on September 30. On January 1, 2017, James had borrowed $360,000 at 11% to partially finance the construction. The remaining amount was paid to Sam upon delivery of the airplane on June 30, 2018.

James has approximately $1,600,000 of additional debt outstanding at December 31, 2017 at an average interest cost of 12%. And at the end of December 2018, $ 345,000 of the construction loan and $1,500,000 of the additional debt was outstanding.

What is the total capitalized cost of the airplane under construction at the end of 2017?

What is the total capitalized cost of the completed airplane at the end of 2018?

Answer 1

Calculation of weighted average expenditure
Date	Fund provided	Months	Weighted
2017	(a)	(b)	(axb/12)
01-01-2017	400,000.00	12	400,000.00
30-09-2017	450,000.00	3	112,500.00
	Total for 2017		512,500.00
2018
Opening	850,000.00	12	850,000.00
30-06-2018	1,650,000.00	6	825,000.00
	Total for 2018		1,675,000.00
Weighted average cost of funds
Loan	Amount	Rate	Interest
2017	(a)	(b)	(axb)
Loan 1	360,000.00	11%	39,600.00
Debt o/s	1,600,000.00	12%	192,000.00
Total	1,960,000.00		231,600.00
Weighted average			11.82%
Total of (axb)/a
2018
Loan 1*	352,500.00	11%	38,775.00
Debt o/s*	1,550,000.00	12%	186,000.00
Total	1,902,500.00		224,775.00
Weighted average			11.81%
* The simple average of opening 360k and closing 345k is taken. Same for debt o/s)
Interest Capitalization
Year	Weighted average of Loan	Weighted avg. of Int	Interest to be capitalized
2017	512,500.00	11.82%	60,577
2,018	1,675,000.00	11.81%	197,817
			258,394

Total Cost for 2017 (2017 WIP)

Total Amount Paid to contractor - 850,000.00

Interest to be capitalized             -     60,577

Total      (WIP)                             -   910,577

Total Cost for 2018 (to capitalize)

Opening balance (WIP)                  -   910,577                                                     

Total Amount Paid 2018               - 1,650,000

Interest to be capitalized               -    197,817

Total to be transferred to asset     - 2,758,394