Question

Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2017 and was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during 2017:

Date		Payment
June 1, 2017		$5,856,000
August 31, 2017		9,120,000
December 31, 2017		7,440,000

In order to help finance the construction, Dobbs issued the following during 2017:

1.	$5,110,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest payable annually on May 31.
2.	300,000 shares of no-par common stock, issued at $10 per share on October 1, 2017.

In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $1,247,000, 12% note payable dated January 1, 2013 and due January 1, 2023, with interest payable annually on January 1.

Compute the amounts of each of the following:

1.		Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
2.		Avoidable interest incurred during 2017.
3.		Total amount of interest cost to be capitalized during 2017.

1.		Weighted-average accumulated expenditures		$
2.		Avoidable interest		$
3.		Amount of interest cost to be capitalized		$

Answer 1

The interest that needs to be capitalized is the lower of the avoidable interest and the actual interest paid during the period.

Requirement 1

Date	Capitalization expenditures	Period	Weighted- average accumulated expenditure
43,983	5,856,000	7/12	3,416,000
44,074	9,120,000	4/12	3,040,000
44,196	7,440,000	0	-
			6,456,000

Requirement 2

Weighted- average accumulated expenditure	Appropriate interest rates	Avoidable interest
5,110,000	0.09	459900
1,346,000*	0.12	161520
6,456,000		621420

* 6,456,000 – 5110,000 = 1346,000

Requirement 3

Actual interest earned during 2017:

9% bonds payable = 5110,000 * 9% * 7/12 = $ 268,275

12% notes payable = 1247,000 * 0.12 * 12/12 = $ 149,640

Total interest = $ 417,915

The interest cost to be capitalized is $ 417,915 (the lesser of the 621,420 avoidable interest and the $417,915 actual interest cost).