Question

In: Accounting

On January 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant...

On January 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant was completed on December 31, 2016. Expenditures on the project were as follows (in $ millions):

January 1, 2015 $1

July 1, 2015 54

October 1, 2015 22

February 1, 2016 30

April 1, 2016 21

September 1, 2016 20

December 31, 2016 6

On January 1, 2015, Crocus obtained a $60 million construction loan with a 6% interest rate. The loan was outstanding through the end of December, 2016. The company's other interest-bearing debt was a long-term note for $70 million with an interest rate of 8% and a bond payable for $30 million with an interest rate of 5%. The note and bond were outstanding during all of 2015 and 2016. The company's fiscal year-end is December 31.

What is the amount of interest that Crocus should capitalize in 2015, using the average interest method?

What is the amount of interest that Crocus should capitalize in 2016, using the average interest method?

Solutions

Expert Solution

Average expenditure in 2015
Date Expenditure (in Million) Average Expenditure
1-Jan-15 1 1
1-Jul-15 54 27
1-Oct-15 22 5.5
33.5
Average Expenditure= (Actual Expenditure* No of months fund utilized)
12
Average expenditure in 2016
Date Expenditure (in Million) Average Expenditure
1-Apr-16 21 15.75
1-Sep-16 20 6.67
31-Dec-16 6 0
22.4
Total Interest
Particular Amount interest Rate Total Interest
Loan 60 6% 3.6
debt 70 8% 5.6
Bond Payable 30 5% 1.5
160 10.7
Average Interest rate 6.69%
Interest Capitalization (in $ million)
interest to capatilized in 2015= average Expenditure * average Interest Rate
interest to capatilized in 2015= 2.24
interest to capatilized in 2015= 1.50

ekkarill92 answered 1 year ago
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