Question

Vaughn Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Vaughn since 2012. Vaughn’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Vaughn now carries CDs in addition to books.

On June 1, 2017, Vaughn contracted with Black Construction to have a new building constructed for $5,680,000 on land owned by Vaughn. The payments made by Vaughn to Black Construction are shown in the schedule below.

Date
Amount
July 30, 2017
$1,278,000
January 30, 2018
2,130,000
May 30, 2018
2,272,000
   Total payments
$5,680,000

Construction was completed and the building was ready for occupancy on May 27, 2018. Vaughn had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year.

10%, 5-year note payable of $2,840,000, dated April 1, 2014, with interest payable annually on April 1.
12%, 10-year bond issue of $4,260,000 sold at par on June 30, 2010, with interest payable annually on June 30.

The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.

Compute the weighted-average accumulated expenditures on Vaughn’s new building during the capitalization period.

Weighted-Average Accumulated Expenditures
$

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Compute the avoidable interest on Vaughn’s new building. (Round intermediate percentage calculation to 1 decimal place, e.g. 15.6% and final answer to 0 decimal places, e.g. 5,125.)

Avoidable Interest
$

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Some interest cost of Vaughn Inc. is capitalized for the year ended May 31, 2018. Compute the amount of each items that must be disclosed in Vaughn’s financial statements.

Total actual interest cost
$
Total interest capitalized
$
Total interest expensed
$

Answer 1

Weighted Average Expenditure-2017			1,775,000.00
Date	Expenditure	No. of Months	Weight	Weighted Expenditure
30-Jul	1,278,000.00	10	0.833333333	1,065,000.00
30-Jan	2,130,000.00	4	0.333333333	710,000.00
30-May	2,272,000.00	0	0	-
	5,680,000.00			1,775,000.00

Avoidabe Interest

1775000*11.20%

198,800.00

Workings:

	Average Interest Rate
	Amount	Interest
5-year note	2,840,000.00	284,000.00
10-year bond	4,260,000.00	511,200.00
	7,100,000.00	795,200.00
	Average Interest Rate	795200/7100000	11.2%

	2017
Total Interest	795,200.00
Interest Captilized	198,800.00
Interest Expenses	596,400.00

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