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In: Accounting

On March 1, 2019, Asbah contracted Nabali & Fares Construction Co. to construct a building on...

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. $ 183,000
b. $ 195,000
c. $ 159,000
d. $ 135,000

Solutions

Expert Solution

d. $ 1,35,000
Calculation of Average Amount Capitalised during the year
Date Expenditures Amount No. of months Average (In $)
March 1,2019 12,00,000 7 7,00,000
May 1,2019 16,80,000 5 7,00,000
Aug. 1,2019 30,00,000 2 5,00,000
Sep. 30, 2019 48,00,000 0 0
Total 19,00,000
Interest Cost to be capitalised
=15,00,000 X 9% 1,35,000
Note: - 12%, 6-year note was payable on dated January 1, 2019, it is paid before March 1,2019 and there is no other borrowing, Therefore no interest Interest will be charged except interest on a 9%, 3-year note payable and threre will be no other capitalisation.

ekkarill92 answered 1 year ago
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