In: Accounting
The following three situations involve the capitalization of interest.
Situation I
On January 1, 2017, Grouper, Inc. signed a fixed-price contract to
have Builder Associates construct a major plant facility at a cost
of $4,323,000. It was estimated that it would take 3 years to
complete the project. Also on January 1, 2017, to finance the
construction cost, Grouper borrowed $4,323,000 payable in 10 annual
installments of $432,300, plus interest at the rate of 10%. During
2017, Grouper made deposit and progress payments totaling
$1,621,125 under the contract; the weighted-average amount of
accumulated expenditures was $864,600 for the year. The excess
borrowed funds were invested in short-term securities, from which
Grouper realized investment income of $252,200.
What amount should Grouper report as capitalized interest at
December 31, 2017?
Capitalized interest? Situation II
All of these assets required an extended period of time for completion. Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
|
Situation-1 | |||||||||||||||
Amount to be capitalized= Lower of avoidable interest or Actual interest | |||||||||||||||
Avoidable interest =Weighted average accumulated expenditure*interest rate=864600*10%=86460 | |||||||||||||||
Actual interest=$ 4323000*10%=432300 | |||||||||||||||
Amount to be capitalized= Lower of 86460 or 432300=$ 86460 | |||||||||||||||
As Per FASB statement no.62, interest earned on the unexpended portion of loan cant be adjusted against the interest to be capitalized. | |||||||||||||||
Situation-II | |||||||||||||||
As per FASB statement no.34, Assets qualifies for interest capitalization includes | |||||||||||||||
Asset constructed for an organization's own use | |||||||||||||||
Asset produced according to customer specification | |||||||||||||||
Interest to be capitalized=33960+9250=$ 43210 | |||||||||||||||
Situation-III | |||||||||||||||
Amount to be capitalized= Lower of avoidable interest or Actual interest | |||||||||||||||
Avoidable interest =Weighted average accumulated expenditure*interest rate | |||||||||||||||
Weighted average accumulated expenditure=6431600/2=3215800 | |||||||||||||||
Avoidable interest =3215800*11%=353738 | |||||||||||||||
Actual interest=9188000*11%=1010680 | |||||||||||||||
Amount to be capitalized= Lower of 353738 or 1010680=$ 353738 | |||||||||||||||
As Per FASB statement no.62, interest earned on the unexpended portion of loan cant be adjusted against the interest to be capitalized. |