Question

On March 1, 2019, Asbah contracted Nabali & Fares Construction Co. to construct a building on land costing $800,000 (purchased from the contractor and included in the first payment). The construction began on the office building on March 1. The following expenditures were incurred for construction: Date Expenditures March 1, 2019 $ 1,200,000 May 1, 2019 1,680,000 August 1, 2019 3,000,000 September 30, 2019 4,800,000 The building was completed and ready for occupancy on September 30, 2019. To finance purchase of the land and construction of the building, $1,500,000 was borrowed on March 1, 2019 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2019 was a $1,000,000, 12%, 6-year note payable dated January 1, 2019. The interest cost to be capitalized during 2019 is

Select one: a. $ 195,000 b. $ 183,000 c. $ 159,000 d. $ 135,000

Answer 1

Answer:

Option d is the correct answer. i.e. $135,000

Explanation:

Payment date	Expenditures	Capitlization period	Weight	Weighted expenditures
Mar.1	$   1,200,000	7 months	0.58	$          700,000
May.1	$   1,680,000	5 months	0.42	$          700,000
Aug.1	$   3,000,000	2 months	0.17	$          500,000
Sep.30	$   4,800,000	0 months	0.00	$                     -
Weighted-Average Accumulated Expenditures	$      1,900,000
Funding	Amount	Rate	Avoidable Interest
Specific Loan (9% note)	$   1,500,000	9.00%	$                 135,000
General Loan (12% notes)	$      400,000	12.00%	$                   48,000
	$                 135,000
Loan	Amount	Rate	Actual Interest
Construction loan	$   1,500,000	9%	$                   78,750
12% 6-year note payable	$   1,000,000	12%	$                 120,000
Actual Interest cost	$                 198,750

Interest cost to be capitalized is lower of actual interest or avoidable interest.

Hence, capitalized interest cost during 2019 = $135,000