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 $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 2018:

$9,000,000, 10% bonds

$6,000,000, 8% long-term note

Construction expenditures incurred during 2018 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 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

calculation of average accumulated expenditure
month	construction exp	interest outstanding	accumulated expenditure
01-Jan	900000	12/12	900000
31-Mar	1500000	9/12	1125000
30-Jun	1160000	6/12	580000
30-Sep	900000	3/12	225000
31-Dec	700000	0	0
			2830000
Calculation of weighted average rate of debt
Bonds		9000000	10%	900000
Long term notes		6000000	8%	480000
Total		15000000		1380000
weighted average rate = 1380000/15000000 = 9.20%
amount of difference = average accumulated exp-construction loan
amount of difference = 2830000-2200000 = 630000
Interest on difference amount = 630000*9.20% = 57960
interest on construction loan = 2200000*8% =176000
interest capitalized = interest on construction load-interest on difference amount
interest capitalized = 176000-57960
Interest capitalized = 118040