Question

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 31, 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:

$4,000,000, 6% note
$16,000,000, 10% bonds

Construction expenditures incurred were as follows:

March 31, 2018	$4,000,000
June 30, 2018	6,000,000
November 30, 2018	1,800,000
February 28, 2019	3,000,000

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

Required:

Calculate the amount of interest capitalized for 2018 and 2019

Answer 1

Construction of Building
Schedule of Weighted-Average accumulated expenditure - 2018
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
31-Mar-18	$4,000,000.00	9/12	$3000000
30-Jun-18	$6,000,000.00	6/12	$3000000
30-Nov-18	$1,800,000.00	1/12	$150000
	$11,800,000.00		$6,150,000.00

Construction of Building
Schedule of Weighted-Average accumulated expenditure - 2019
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
Beginning balance	$11,800,000.00	4/12	$3,933,333.33
28-Feb-19	$3,000,000.00	2/12	$400,000.00
	$14,800,000.00		$4,433,333.33

Weighted average interest rate for capitalization purpose = (6% * $4,000,000 / $20,000,000) + (10% * $16,000,000 / $20,000,000)

= 9.20%

Interest to be capitalized in 2018 = $6,150,000.00 * 9.20% = $565,800

Interest to be capitalized in 2019 = $4,433,333.33 * 9.20% = $407867