Question

At the beginning of 2018, Heinz Corp. started construction on a new office building. Construction expenditures during 2018 were as follows:

January 1                     $400,000

May 1                          150,000

July 1                         300,000  

December 31               100,000   

Heinz has the following debts outstanding during 2018; the bonds payable is directly related to the construction projects; none of the others are related to the construction project.

Liability	Annual Percent	Loan Amount
Notes Payable	4%	$200,000
Bonds Payable	6%	$400,000
Mortgage Payable	5%	$300,000

Answer 1

	Actual interest expenditure incurred:
				Principal	Interest %	Interest expenditure
				1	2	1*2
	6 % Bonds payable-Specific loan for construction			400000	6%	24000
	4% note-General purpose			200000	4%	8000
	5% Mortgage payable-General purpose			300000	5%	15000
						47000
	Avoidable interest=Weighted average accumulated expenditure*interest rate
	Weighted average accumulated expenditure:
	Date	Expense	Capitalization period	Weight	Weighted expenditure
		A	B	C=B/12	A*C
	1-Jan	400000	12 months	1.00	400000
	1-May	150000	8 months	0.67	100000
	1-Jul	300000	6 months	0.50	150000
	31-Dec	100000	0 months	0.00	0
					650000
	Weighted average interest rate for general purpose notes:
				Principal	Interest %	Interest expenditure
	4% note-General purpose			200000	4%	8000
	5% Mortgage payable-General purpose			300000	5%	15000
				500000		23000
	Weighted average interest rate=23000/500000=4.60%
	Avoidable interest:
				Principal	Interest %	Interest expenditure
	Specific note			400000	6%	24000
	General note			250000	4.60%	11500
				(650000-400000)
						35500
	Interest to be capitalized=Lower of actual interest or avoidable interest=Lower of 47000 or 35500=35500
	Hence interest to be charged to expense=Actual interest-Interest capitalized=47000-35500=11500