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 $2,500,000 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, 9% bonds

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

Construction expenditures incurred during 2021 were as follows:

January 1	$	1,000,000
March 31		1,600,000
June 30		1,280,000
September 30		1,000,000
December 31		800,000

Required:
Calculate the amount of interest capitalized for 2021 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

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Interest capitalized for 2021 is $250,740
Workings:
Date	Expenditure		Weight		Average
Jan-01	$                        10,00,000	X	12/12	=	$     10,00,000
Mar-31	$                        16,00,000	X	9/12	=	$     12,00,000
Jun-30	$                        12,80,000	X	6/12	=	$       6,40,000
Sep-30	$                        10,00,000	X	3/12	=	$       2,50,000
Dec-31	$                          8,00,000	X	0	=	$                    -
Accumulated Expenditure	$                        56,80,000				$     30,90,000
	Average		Interest rate		Capitalized Interest
Accumulated accumulated Expenditure	$                        30,90,000
Construction loan	$                        25,00,000	X	8.0%	=	$       2,00,000
Other loan	$                          5,90,000	X	8.6%	=	$           50,740
				=	$       2,50,740
Weighted Average rate of all debt:-
	$                        90,00,000	X	9%	=	$       8,10,000
	$                        60,00,000	X	8%	=	$       4,80,000
	$                    1,50,00,000				$     12,90,000
	Weighted Average rate of all debt =				8.6%
	($1290000 / $15000000)