Question

On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $2,200,000 at 8% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021: $9,000,000, 10% bonds $6,000,000, 8% long-term note Construction expenditures incurred during 2021 were as follows: January 1 $ 900,000 March 31 1,500,000 June 30 1,160,000 September 30 900,000 December 31 700,000

Required: Calculate the amount of interest capitalized for 2021 using the specific interest method.

Answer 1

Answer : $436,360

Explanation :

1 . Weighted-average rate of all other debt

Bonds	$9,000,000	($9,000,000 *10%) = $900,000
Long-term note	$6,000,000	($6,000,000 * 8%) = $480,000
	$15,000,000	$1,380,000
Weighted-average rate of all other debt = $1,380,000 / $15,000,000		9.2%

2. Weighted-average Accumulated expenditure

Date (A)	Expenditure (B)	Weight (C)	Average (B*C)
January 1	$900,000	12/ 12	$900,000
March 31	$1,500,000	9/ 12	$1,125,000
June 30	$1,160,000	6/12	$580,000
September 30	$900,000	3/12	$225,000
December 31	$700,000	0/12	$0
Weighted-average Accumulated expenditure			$2,830,000

Computation of amount of interest capitalize.

	Average Exp (A)	Interest Rate (B)	Capitalized Interest (B*C)
Construction loan	$2,200,000	8 %	$176,000
Accumulated expenditure	$2,830,000 [Note 2]	9.2% [Note1]	$260,360
Interest capitalize			$436,360