Question

XYZ Corp began construction on a building on January 1, 2016. On that date, it made its first $500,000 payment. An additional $600,000 were paid on 4/1/2016 and $300,000 was paid on 7/1/2016. A final payment of $100,000 was made on 12/31/2016, which is also the date when the construction project was finished and the building was ready to use.

To finance the project, XYZ Corp issued a $800,000 10% note. Furthermore, XYZ Corp had a $2,000,000 5% note outstanding that was not specifically related to the construction project. Both Notes were outstanding for the entire construction project.

What are the weighted average accumulated expenditures on the construction project?

How much interest should be capitalized during 2016?

What is the value of the Building on the 12/31/2016 Balance Sheet of XYZ Corp?

What is the interest expense that XYZ Corp records during 2016?

Answer 1

1. Calculation of Weighted average expenditure.

date	Expense	Weight	Weighted Average
01-Jan	500,000	500,000 x 12 / 12	500,000
01-April	600,000	600,000 / 12 x 9	450,000
01-july	300,000	300,000 / 12 x 6	150,000
31-Dec	100,000	100,000 / 12 x 0	0
	1,500,000		1,100,000

Weighted Average Accumulated Expenditure = $1,100,000

2. Interest to be capitalized

Interest on loan taken specifically for the project = $800,000 x 10% = $80,000

Interest on loan taken generally = $2,000,000 x 5% = $100,000

Interest to be capitalized

	Amount	Proportional Interest
Interest on loan for project	80,000	80,000
Interest on general loan	100,000	100,000 / 2,000,000 x (1100000 - 800,000) = 15,000
Total Interest		95,000

3. Value of Building on 31/12/2016 = Total Expenditure capitalized + Interest Capitalized

= 15,00,000 + 95,000 = $1,595,000

4. Interest Expense = 100,000 - 15,000 = $85,000