Question

Interest During Construction

Matrix Inc. borrowed $1,000,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2019, and was completed on October 31, 2019. Expenditures related to this building were:

January 1	$258,000	(includes cost of purchasing land of $150,000)
May 1	310,000
July 1	450,000
October 31	280,000

In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.

Required:

1. Compute the amount of interest capitalized related to the construction of the building.

   $

2. If the expenditures are assumed to have been incurred evenly throughout the year:
   Compute weighted-average accumulated expenditures

   $

   
   Compute the amount of interest capitalized on the building

   $

Answer 1

Expenditure Portion Outstanding Weighted Average
Date	Amount(a)	{No. of month/12}(b)	Amount (a)*(b)
January 1st	258,000	10/12	215,000
May 1st	310,000	6/12	155,000
July 1st	450,000	4/12	150,000
October 31st	280,000	0/12	-
			520,000
Avoidable Interest = 520,000 * 8% = $41,600
Actual Interest :-
Amount	Rate	Interest(in $)
1,100,000	8%	88,000
500,000	9%	45,000
800,000	10%	80,000
Actual Interest		213,000
Avoidable interest is lower than actual interest thus $41,600 will be capitalized.

2.Weighted average accumulated expenditure

= (258,000+310,000+450,000+280,000)/2

= $ 649,000

3. Amount of interest capitalized in building = (649,000*8%) = $51,920