Question

In: Accounting

On January 1, 2017, James Airlines contracted with Sam Aircraft to construct an airplane to Jamess...

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?

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago
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