Question

ABC Company’s fiscal year ends June 30. The company began construction of a new manufacturing plant on December 1, 2017. On this date, the company had the following transactions:

Cash Paid on December 1, 2017:
Land	139,000
Surveying Costs	2,000
Title Insurance Premium	4,000
Demolish old building	3,000
Architectural plans	30,000
Building permits	3,000
Cash Received on December 31, 2017:
Salvaged materials from demolition	1,000

        Excavation work began during the first week in December with payments made to the contractor as follows:

Date of Payment	Amount of Payment
3/1/18	240,000
5/1/18	330,000
7/1/18	60,000

        The building was completed on June 30, 2018 – the last day of the company’s fiscal year.

To finance construction, ABC borrowed $600,000 (due in 10 years, 8%, payable annually on December 1) from the bank on December 1, 2017. The company had no other loans outstanding.

Calculate the weighted average accumulated expenditures.

Calculate avoidable interest.

Calculate actual interest.

Prepare a schedule indicating the amount of interest to be capitalized.

Using the attached T-account template, prepare the entry to recognize each of the cash transactions indicated above and the recognition of the completion of the construction project.

Answer 1

Capitalisation Period begins when

1. Expenditure made (Cash Paid or Debt Incurred)
2. Activities to get asset ready for use have begun
3. Interest is being incurred

So, on Dec 1st,2017 the capitalisation period has begun.

Weighted Average Accumulated Expenses

Avoidable Interest

Accumulated Expenditure x Interest Rate [As there is no general debt and the expenses did not exceed the Loan Amount]

==> Avoidable Interest = $411,571 * 8% * 7/12 = $19,206.67

Actual Interest

Debt = $600,000 * 8% * 7/12 = $28,000

Actual Interest	$28,000
Avoidable Interest	$19,207
Interest Capitalised	$19,207
Interest Expense	$ 8,793

Journal Entry is quite easy.

Just transfer all expense capitalised to the Asset Account.

Good luck