Question

In: Accounting

Construction of a new building began on April 1 and was completed on October 29. Construction...

Construction of a new building began on April 1 and was completed on October 29. Construction expenditures were as follows:

May 1 $3,300,000
July 30 2,200,000
September 1 1,740,000
October 1 2,640,000

MMI borrowed $5,000,000 at 6% on April 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $6,650,000, 8% long-term note payable outstanding throughout 2021.

Weighted Average Accumulated Expenditures were: [Round expenditure to nearest dollar]

Date Expenditure Months financed (out of 7) WA Accum Exp
March 28** $ 998,600 7 998,600
April 30** 148,000 6 126,857
May 1 3,300,000
July 30 2,200,000
September 1 1,740,000
October 1 2,640,000
Total


**According to ASC 835-20-15-8, “If activities are undertaken for the purpose of developing land for a particular use, the expenditures to acquire the land qualify for interest capitalization while those activities are in progress. The interest cost capitalized on those expenditures is a cost of acquiring the asset that results from those activities. If the resulting asset is a structure, such as a plant or a shopping center, interest capitalized on the land expenditures is part of the acquisition cost of the structure.”

Solutions

Expert Solution

WEIGHTED AVERAGE ACCUMULATED EXPENDITURE
PAYMENT DATE EXPENDITURES(A) CAPITALISATION PERIOD (MONTH) (B) WIEGHT(C=B/7) WEIGHTED EXPENDITURE (A*C)
28-Mar $              9,98,600 7                          1.0000 $                                       9,98,600
30-Apr $              1,48,000 6                          0.8571 $                                       1,26,857
01-May $            33,00,000 6                          0.8571 $                                     28,28,571
30-Jul $            22,00,000 3                          0.4286 $                                       9,42,857
01-Sep $            17,40,000 2                          0.2857 $                                       4,97,143
01-Oct $            26,40,000 1                          0.1429 $                                       3,77,143
Total $                                     57,71,171
OUT OF THIS $57,71,171 ; $50,00,000 IS FINANCED BY SPECIFIED LOAN AND BALANCE $7,71,171 FINANCED BY GENERAL PURPOSE LONG TERM NOTES; INTEREST ON SPECIFIC LOAN IS 6% AND INTEREST RATE FOR THE GENERAL PURPOSE LONG TERM NOTES IS 8% .
COMPUTATION OF AVOIDABLE INTERST
FUNDING AMOUNT RATE(%) AVOIDABLE INTEREST
SPECIFIC LOAN $            50,00,000                                        6.0000 $                   3,00,000
GENERAL LOAN $              7,71,171                                        8.0000 $                      61,694
TOTAL $                   3,61,694
INTEREST COST TO BE CAPITALISED IS $ 3,61,694

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