Question
In: Accounting
On January 1, 2020, Lawrence Co. began construction of a building to be used as its...
On January 1, 2020, Lawrence Co. began construction of
a building to be used as its office headquarters. The building is
expected to be completed on December 31, 2020. Expenditures on this
project during 2020 were as follows:
January 1st $
160,000
March
1st
420,000
June
1st
270,000
October
31st
165,000
On Jan. 1, 2020, the company obtained a $600,000 specific
construction loan with a 7% interest rate. The loan was outstanding
during the entire construction period. The company’s other
interest-bearing debts included two long-term notes of $480,000 and
$900,000 with interest rates of 10% and 11%, respectively. Both
notes were outstanding during the entire construction period.
Instruction:
(a) Determine the amount of interest capitalized for 2020. Please
show your work (i.e. the weighted average accumulated expenditure,
the actual interest, the weighted average interest rate, and the
avoidable interest) to support your final answer. Please round the
WA interest rate to four decimal places when
necessary.
Answer: The amount of interest
capitalized for 2020
is
.
(b) Regardless your answer in (a), determine the amount of
avoidable interest for 2020 assuming that the weighted average
accumulated expenditure is $534,000 (other things being
equal).
Solutions
Expert Solution
Requirement:A
| Interest capitalized for 2020 [Lower of Actual or Avoidable Interest] | $ 52,120 |
Working:
| Calculation of weighted average accumulated expenditure | |||
| Date | Amount | Capitalization Period( Months) | Expenditure |
| Jan. 1 | $ 160,000.00 | 12 | $ 160,000.00 |
| March. 1 | $ 420,000.00 | 10 | $ 350,000.00 |
| June. 1 | $ 270,000.00 | 7 | $ 157,500.00 |
| Oct. 31 | $ 165,000.00 | 2 | $ 27,500.00 |
| $ 1,015,000.00 | $ 695,000.00 | ||
| Calculation of general interest rate | |||
| Debt | Amount | Interest rate | Interest Amount |
| 10% Note Payable | $ 480,000.00 | 10.00% | $ 48,000.00 |
| 11% Note Payable | $ 900,000.00 | 11.00% | $ 99,000.00 |
| Total | $ 1,380,000.00 | 10.6522% | $ 147,000.00 |
| Calculation of Avoidable Interest | |||
| Debt | Amount | Interest rate | Interest Amount |
| Specfic Debt | $ 600,000.00 | 7.00% | $ 42,000 |
| Remaining Loan | $ 95,000.00 | 10.6522% | $ 10,120 |
| Total | $ 695,000.00 | $ 52,120 | |
| Calculation of Actual Interest | |||
| Debt | Amount | Interest rate | Interest Amount |
| Construction Note 12% | $ 600,000.00 | 7.00% | $ 42,000 |
| 10% Note Payable | $ 480,000.00 | 10.00% | $ 48,000 |
| 11% Note Payable | $ 900,000.00 | 11.00% | $ 99,000 |
| Total | $ 1,980,000.00 | $ 189,000 | |
Requirement:B
| Avoidable Interest | $ 37,380 |
Working:
| Calculation of Avoidable Interest | |||
| Debt | Amount | Interest rate | Interest Amount |
| Specfic Debt | $ 534,000.00 | 7.00% | $ 37,380 |
| Remaining Loan | $ - | 0.0000% | $ - |
| Total | $ 534,000.00 | $ 37,380 | |
ekkarill92 answered 1 year agoRelated Solutions
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