Question

Montgomery Industries spent $500,000 in 2017 on a construction project to build a library. Montgomery also capitalized $25,000 of interest on the project in 2017. Montgomery financed 100% of the construction with a 8% construction loan. The project was completed on September 30, 2018. Additional expenditures in 2018 were as follows:

Feb. 28 $ 81,000

Apr. 30 171,000

Jul. 1 27,000

Sept. 30 55,000

Required: Determine the completed cost of the library. (Do not round intermediate calculations)

Answer 1

For calculating the completed cost of the library, we need to calculate the amount of interest to be capitalized for 2018 which is equal to weighted average accumulated expenditure multiplied by the weighted average interest rate on loan outstanding. Therefore, firstly we need to calculate the interest to be capitalized for the year 2018 which is shown as follows:-

Calculation of Interest to be capitalized for 2018 (Amounts in $)

Date of Payment	Amount (A)	Months Due (B)	Accumulated Expenditure (A*B)
Beginning Balance	525,000 (500,000+25,000)	9/12	393,750
Feb. 28	81,000	7/12	47,250
Apr. 30	171,000	5/12	71,250
Jul. 1	27,000	3/12	6,750
Sept. 30	55,000	0/12	0
Weighted Avg Accumulated Exp. (i)			519,000
Interest rate on construction loan (ii)			8%
Interest to be capitalized for 2018 (i*ii)			41,520

Completed cost of library = $525,000+$41,520 = $566,520

Therefore the completed cost of the library is $566,520.