Question

Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2014 and was completed on December 31, 2014. Dobbs made the following payments to Kiner, Inc. during 2014:

Date                                              Payment

June 1, 2014                                 $6,000,000

August 31, 2014                             9,000,000

December 31, 2014                        7,500,000

In order to help finance the construction, Dobbs issued the following during 2014:

1.   $5,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2014, with interest payable annually on May 31.

2.   1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2014.

In addition to the 9% bonds payable, the only debt outstanding during 2014 was a $1,250,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on January 1.

Instructions

Compute the amounts of each of the following:

1.   Weighted-average accumulated expenditures qualifying for capitalization of interest cost.

2.   Avoidable interest incurred during 2014.

3.   Total amount of interest cost to be capitalized during 2014.

Answer 1

Solution

1. Weighted-average accumulated expenditures $

   Weighted-average accumulated expenditures will be calculated as follow.Construction was begun on June 1, 2014 and was completed on December 31, 2014.So it is period of 7 months.Dobbs made the following payments to Kiner, on frequent date so calculation is as follow.

Date	Capitalization expenditure	period	Weighted Avg accumulted exp
1-June	60,00,000	7/12	35,00,000
31-Aug	90,00,000	4/12	30,00,000
31-Dec	75,00,000	0	0
			65,00,000

2. Avoidable interest incurred during 2014

Avoidable interest incurred during 2014  will be calculated as follow.

Weighted Avg Accumulted Exp	Interest rate	Avoidable interest
50,00000	.09	450,000
15,00,000	.12	180,000
65,00,000		630,000

3. Total amount of interest cost to be capitalized during 2014

The calculation of total amount of interest cost to be capitalized during 2014 will as follow

Actual interest incurred during 2014

9% bonds payable, $50,00,000 × .09 × 7/12 = $262,500

12% note payable, $1,250,000 × .12 = $150,000

Total 412,500

The interest cost to be capitalized is $412,500 (the lesser of the $630,000 avoidable interestand the $412,500 actual interest cost).

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