Question

On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021	$	326,000
September 1, 2021	$	477,000
December 31, 2021	$	477,000
March 31, 2022	$	477,000
September 30, 2022	$	326,000

Dreamworld had $5,900,000 in 12% bonds outstanding through both years.

What was the final cost of Dreamworld's warehouse?

Answer 1

Step 1:-

Calculate the Weighted average expenditure and interest capitalization for 2021

Year 2021
Date	Expenditure	*	Weight		Average
January 1, 2021	326,000		12/12	=	326,000
September 1, 2021	477,000		04/12	=	159,000
December 31, 2021	477,000		0/12	=	0
Accumulated expenditures	1,280,000				485,000

Interest Capitalization = $58,200 ($485,000 * 12%)

Step 2:-

Calculate the weighted average expenditure and interest capitalization for 2022

Date	Expenditure	*	Weight		Average
Accumulated Expenditures as of 12/31/2021	1,280,000		12/12	=	1,280,000
Interest Charges for 2021	58,200		12/12	=	58,200
March 31, 2022	477,000		06/12	=	238,500
September 30,2022	326,000		0/12	=	0
Accumulated expenditures	2,141,200				1,576,700

The weighted average expenditure and interest capitalization is as follows:-

Accumulated Expenditures as of 09/30/22	2,141,200
Interest capitalization for 2022	189,204	($1,576,700* 12%
Total capitalized cost	2,330,404

The final cost of Dreamworld's warehouse is $2,330,404