Question

Early in 2020, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2020 and was completed on December 31, 2020. Dobbs made the following payments to Kiner, Inc. during 2020:

Date		Payment
June 1, 2020		$2,440,000
August 31, 2020		3,660,000
December 31, 2020		3,050,000

In order to help finance the construction, Dobbs issued the following during 2020:

1.	$2,074,000 of 10-year, 9% bonds payable, issued at par on May 31, 2020, with interest payable annually on May 31.
2.	300,000 shares of no-par common stock, issued at $10 per share on October 1, 2020.

In addition to the 9% bonds payable, the only debt outstanding during 2020 was a $518,500, 12% note payable dated January 1, 2016 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 2020.
3.		Total amount of interest cost to be capitalized during 2020.

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

Answer 1

Solution

Solution 1:

Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 June 2020	$24,40,000	7/12	$14,23,333
31 August 2020	$36,60,000	4/12	$12,20,000
31 December 2020	$30,50,000	0/7	$0
Total	$91,50,000		$26,43,333

Solution 2:

Computation of Avoidable Interest
Debt	Weighted Average Accumulated Expenditures	Interest rate	Avoidable Interest amount
From 9% Bond	$20,74,000	9%	$1,86,660
From 12% Note	$518,500	12%	$62,220
Totals	$25,92,500		$2,48,880

Solution 3:

Computation of Actual Interest cost incurred
Debt	Weighted Average Accumulated Expenditures	Interest rate	Actual Interest
From 9% Bond (for 7 months)	$20,74,000	9%	$1,08,885
From 12% Note	$5,18,500	12%	$62,220
Totals	$25,92,500		$1,71,105
Total amount of Interest cost to be capitalized for 2020 (Lower of actual interest or Avoidable interest)	$1,71,105

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