Question

On January 1, 2018, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2019. Construction expenditures for 2018, which were incurred evenly throughout the year, totaled $7,200,000. Marjlee had the following debt obligations which were outstanding during all of 2018:

Construction loan, 10%	$	1,800,000
Long-term note, 9%		2,400,000
Long-term note, 6%		4,800,000

Required:
Calculate the amount of interest capitalized in 2018 for the building using the specific interest method.
  

Answer 1

Ans:

Interest to be capitalized in 2018 for the building

Average expenditure = 7,200,000/2 = 3,600,000

Weighted average rate:

2,400,000@9%                        = $216,000

4,800,000@6%                         = $288,000

$7,200,000                                = $504,000

504,000/7,200,000                    = 7%

interest capiralised

1,800,000 @ 10%                 = $180,000

1,800,000 @7%                 =     126,000

Interest capitalised              = $306,000

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