1. Cooper, Inc., is constructing a building that qualifies for interest capitalization. The following information...

1. Cooper, Inc., is constructing a building that qualifies for interest capitalization. The following information is available:

Capitalization period: January 1, 2013-December 31, 2014

Expenditures on project (incurred evenly):

2013	$30,000
2014	$50,000

Amounts borrowed and outstanding (all debt incurred January 1, 2013)

$10,000 at 10% (specifically for the construction project)

$18,000 at 11% (general debt)

$30,000 at 13% (general debt)

Required:

a.	Compute the amount of interest that should be capitalized in 2013 and 2014. (Round interest rates to the nearest hundredths, e.g., 07.62%.)
b.	Assume that in 2013 unused borrowed funds were invested and earned interest revenue amounting to $800. How much interest now should be capitalized to the asset account in 2013?

Expert Solution

	Loan Amount	Interest rate	Interest Amount
Specific	10000	10%	1000
General	18000	11%	1980
General	30000	13%	3900
Total	58000		6880
Specific Borrowings included in Above	10000		1000

Weighted Average Capitalisation Rate for General Borrowing
= Total Interest - Interest on Specific Borrowing/Total Borrowing - Specific Borrowing
=(6880-1000)/(58000-10000)
0.1225
12.25%

(a)
2013
Interest on Construction Loan Project First=	=10000*10%	1000
Remaining at Weigted Average Capitalisation Rate=	=20000*12.25%	2450
Interest to be capitalised in 2013		3450
2014
Interest on Remaining Loan =	=28000*12.25%	3430
Interest to be capitalised in 2014		3430

(b)
Amount of Expenditure in 2013	30000
Total Loan in 2013	58000
Unused Borrowed fund in 2013	28000



Weighted Average Capitalisation Rate for General Borrowing
Total Interest - Interest on Specific Borrowings - Interest on unused Fund / Total Borrowings - Specific Borrowing
=(6880-1000-800)/(58000-1000)
0.089122807
8.91%

Interest To be capitalised in 2013
Interest on Construction Loan Project First=	=10000*10%	1000
Remaining at Weigted Average Capitalisation Rate=	=20000*8.91%	1782
Interest to be capitalised in 2013		2782

Note-
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ekkarill92 answered 2 years ago

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