Question

Zimmerman Corporation approved the expansion of their Longview, Texas plant. In conjunction with the expansion, the company borrowed $300,000 at 8% interest from First Cowboys Bank on January 1, 2019. Additionally, the company has other debt including a $100,000 (14%) note and $250,000 (10%) bond. Construction began on the new plant on January 1, 2019 and the following expenditures were incurred prior to the completion of the plant on December 31, 2019: February 1, 2019 $150,000 July 1, 2019 $200,000 November 1, 2019 $500,000 Based on the information provided above, determine the (a) the amount of interest to be capitalized and (b) the amount of interest to be expensed.

How much interest should be capitalized? $_______________________

How much interest should be expensed? $________________________

Answer 1

Calculate Capitalized Interest?

Step 1 – Capitalizion Period

As given in the information above, the capitalization period will be from 1st Jan, 2019 to 31st December, 2019.

Step 2 – Calculate Weighted Average Accumulated Expenditure.

Weighted Average Accumulated Expenditure =$ 1,50,000 x (11/12) + $2,00,000 x (6/12)+ $5,00,000x2/12 = $1,37,500+ $1,00,000 +$83,333 = $ 3,20,833

Step 3 – Determine the interest on the specific borrowings and from the general funds.

other debt including a $100,000 (14%) note

$250,000 (10%) bond.  

Step 4 – Calculate Avoidable Interest

Avoidable Interest = = $3,00,000 x 8% + ($320,833 – $3,00,000) x 12% = $24000 + $2,500 = $26,500

Step 5 – Calculate Actual Interest on the Loans

Actual Interest on the Loans = $1,00,000 x 14% + $2,50,000 x 10% = $14,000 + $25,000 = $39,000

Step 6 – Lower of Actual Interest and Avoidable Interest

Capitalized Interest = ($26,500, $39,000) = $26,500