Question

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 30, 2019. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period:

$5,300,000, 6% note
$12,820,000, 10% bonds

Construction expenditures incurred were as follows:

March 31, 2018	$	3,730,000
June 30, 2018		5,730,000
November 30, 2018		1,746,000
February 28, 2019		2,730,000

The company’s fiscal year-end is December 31.

Required:
Calculate the amount of interest capitalized for 2018 and 2019. (Round weighted average interest rate to 2 decimal places and final answers to the nearest whole dollar.)

Thank you in advance!

Answer 1

Solution:

Construction of Building
Schedule of Weighted-Average accumulated expenditure - 2018
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
31-Mar-18	$3,730,000.00	9/12	$2,797,500.00
30-Jun-18	$5,730,000.00	6/12	$2,865,000.00
30-Nov-18	$1,746,000.00	1/12	$145,500.00
	$11,206,000.00		$5,808,000.00

Construction of Building
Schedule of Weighted-Average accumulated expenditure - 2019
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
Beginning balance	$11,206,000.00	4/12	$3,735,333.33
28-Feb-19	$2,730,000.00	2/12	$455,000.00
	$13,936,000.00		$4,190,333.33

Weighted average interest rate for captialization purpose = (6% * $5,300,000 / $18,120,000) + (10% * $12,820,000 / $18,120,000)

= 8.83%

Interest to be capitalized in 2018 = $5,808,000 * 8.83% = $512,846

Interest to be capitalized in 2019 = $4,190,333 * 8.83% = $370,006