Question

On January 1, 2018, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2019. Construction expenditures for 2018, which were incurred evenly throughout the year, totaled $7,200,000. Marjlee had the following debt obligations which were outstanding during all of 2018:

Construction loan, 11% $ 1,800,000

Long-term note, 10% 2,400,000

Long-term note, 7% 4,800,000

Calculate the amount of interest capitalized in 2018 for the building using the specific interest method.

Answer 1

Answer:

Weighted Average cost of borrowing    =   Weighted Average cost / Total Debt    =   ($ 2,400,000 x 10%) + (4,800,000 x 7%) / ( $ 2,400,000 + 4,800,000 )    =     $ 240,000 + $ 336,000 / $ 7,200,000    =      $ 576,000 / $ 7,200,000    =        8 %

Weighted Average cost of borrowing = 8%

Average Accumulated Expenditure = Total expenditures / 2                                                                          =    $ 7,200,000 / 2 Average Accumulated Expenditure =     $ 3,600,000

Amount of Difference       = Average Accumulated Expenditure (-) Construction Loan     =    ( $ 3,600,000 (-) $ 1,800,000 )     =    $ 1,800,000

Interest on Construction Loan = $ 1,800,000 x 11%   = $ 198,000

Balance interest on Construction Loan = $ 1,800,000 x 8%   = $ 144,000

Interest capitalized in 2018   = $ 198,000 + $ 144,000   = $ 342,000