Question

Early in 2012, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2012 and was completed on December 31, 2012. Dobbs made the following payments to Kiner, Inc. during 2012:

Date                                              Payment

June 1, 2012                                  $4,800,000

August 31, 2012                              7,200,000

December 31, 2012                         6,000,000

            In order to help finance the construction, Dobbs issued $4,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2012, with interest payable annually on May 31.

In addition to the 9% bonds payable, the only debt outstanding during 2012 was a $1,200,000, 12% note payable dated January 1, 2008 and due January 1, 2018, with interest payable annually on January 1.

Instructions

Compute the amounts of each of the following (show computations):

            1. Weighted-average accumulated expenditures qualifying for capitalization of Interest cost    _________________

            2. Avoidable interest incurred during 2012.   _______________

            3. Total amount of interest cost to be capitalized during 2012.   _______________

Answer 1

Solution 1:

Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 June 2012	$48,00,000	7/12	$28,00,000
31 August 2012	$72,00,000	4/12	$24,00,000
31 December 2012	$60,00,000	0/7	$0
Total	$1,80,00,000		$52,00,000

Solution 2:

Computation of Avoidable Interest
Debt	Weighted Average Accumulated Expenditures	Interest rate	Avoidable Interest amount
From 9% Bond	$40,00,000	9%	$3,60,000
From 12% Note	$12,00,000	12%	$1,44,000
Totals	$52,00,000		$5,04,000

Solution 3:

Computation of Actual Interest cost incurred
Debt	Weighted Average Accumulated Expenditures	Interest rate	Actual Interest
From 9% Bond (for 7 months)	$40,00,000	9%	$2,10,000
From 12% Note	$12,00,000	12%	$1,44,000
Totals	$52,00,000		$3,54,000
Total amount of Interest cost to be capitalized for 2020 (Lower of actual interest or Avoidable interest)			$3,54,000