Question

On January 1, 2018, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The company borrowed $1,550,000 at 7% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2018: $9,000,000, 11% bonds $3,000,000, 7% long-term note Construction expenditures incurred during 2018 were as follows: January 1 $ 680,000 March 31 1,280,000 June 30 896,000 September 30 680,000 December 31 480,000 Required: Calculate the amount of interest capitalized for 2018 using the specific interest method. (Do not round the intermediate calculations. Round your percentage answers to 1 decimal place (i.e. 0.123 should be entered as 12.3%).)

Answer 1

Date	Expenditure	*	Weight	=	Average
January 1	$680,000		12/12		$680,000
March 31	$1,280,000		9/12		$960,000
June 30	$896,000		6/12		$448,000
September 30	$680,000		3/12		$170,000
December 31	$480,000		0/12		-
	$4,016,000				$2,258,000

	Average	*	Interest Rate	=	Capitalized interest
Average Accumulated Expenditure	$2,258,000
Construction Loan	$1,550,000		7%		$108,550
Other Loan(Not construction)	$708,000		10%		$70,800
					$179,300

Other Loan = 2,258,000 - 1,550,000 = $708,000

$9,000,000*11% = $9,000,000 11% $990,000

3,000,000*7% = $3,000,000 7% $210,000

$12,000,000 $1,200,000

1,200,000/12,000,000 = 10%