Question

2. On February 1, 2018, Sun Devil Company purchased land for a warehouse & distribution center for $540,000. To help finance the land and construction of the distribution center, $1,725,000 was borrowed on February 1, 2018 on a 9%, 3-year note payable, with interest payable annually every February 1st. Sun Devil began construction on the facility on March 1st. The following expenditures were incurred for construction:

March 1 $ 360,000

May 1 $ 504,000

June 1 $ 900,000

August 1 $1,440,000

The facility was completed and ready for occupancy on August 31st. Other than the construction note, the only debt outstanding during 2018 was a $500,000, 12%, 6-year note payable dated January 1, 2017.

a. Determine the Weighted Average Accumulated Expenditures: $___________________________

b. Using the information presented in #2 above, determine the Avoidable Interest: $_____________________

c. Using the information presented in #2 above, determine the historical cost Sun Devil should report for the warehouse & distribution center: $______________________________

d. formation presented in #2 above, determine Interest Expense for the year ended December 31, 2018: $_____________________________

e. If instead of having $500,000 of non-specific borrowing in #2 above, suppose Sun Devil only had $75,000 of other long-term debt at 12% that was dated January 1, 2017. In this case, what amount of interest cost should be capitalized? $_______________________

Answer 1

Requirement 1
	Determination of weighted average accumulated Expenditures
		Amount of expenditure	Weight Factor	Weighted average accumulated expenditure
	2018
	Feb-01	540000	6/12	270000
	Mar-01	360000	6/12	180000
	May-01	504000	4/12	168000
	Jun-01	900000	3/12	225000
	Aug-01	1440000	1/12	120000
	Total	3744000
	Weighted average accumulated expenditure			963000
Requirement 2
	Avoidable Interest
	Specific Borrowing			963000
	Rate of Interest		9%
	Period of Interest		12 Months
	Amount of Interest on specific borrowings		86670
	Total avoidable interest =		86670
	Actual Interest during capitalization period
	=1725000*9%*6/12		77625
	=500000*12%*6/12		30000
	Total actual Interest		107625
Since avoidable interest does not exceed actual interest, the capitalized interest would be						86670
Requirement 3
	Historical cost of warehouse & distribution center
	Total cost		3744000
	Capitalised Interest		86670
	Historical cost		3830670
Requirement 4
	Interest expense
	Total Interest on general borrowings
	Specific borrowing	=1725000*9%	155250
	General borrowing	=500000*12%	60000
	Amount of Interest		215250
	Less : Interest capitalized		86670
	Interest expense for the year 2018		128580
Requirement 5
	Specific Borrowing			963000
	Rate of Interest		9%
	Period of Interest		12 months
	Amount of Interest on specific borrowings		86670
	Total avoidable		86670
	The actual Interest during capitalized period
	=1725000*9%*6/12		77625
	=75000*12%*6/12		4500
	Total actual Interest		82125
Since actual interest is less than avoidable interest, the actual interest of $82125 will be capitalized