In: Accounting
On March 1, Imhoff Co. began construction of a small building. Payments of $400,000 were made monthly for four months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are? How would I calculate this?
You probably will answer that $400,000 * ((3/12)+(2/12)+1/12))=200,000
But Why is that weighted as 3/12, 2/12 and 1/12 if the project was outstanding just for 3 months started from March 1 and ended in June 1. Shouldn't it be 3/3, 2/3, 1/3? Why?
Answer
Weighted-average accumulated expenditures :
Expenditure Incured on Qulifying Assets * (months of capitalization period /12)
= $400,000 * ((3/12)+(2/12)+1/12)) = $200,000
Note for your understanding :
Weighted-average accumulated expenditures is total of expenditure incurred on qualifying assets multipling by capitalization period representing in year terms .
Now say to convert 3 months in year terms we need to divide 3 by 12 ie 3 /12 = 0.25 years. Thus the correct way is $400,000 * ((3/12)+(2/12)+1/12)) .
Again by your logic if we take $400,000 * ((3/3)+(2/3)+1/3)) = it will come to $800,000 which is not possible as the expenditure itself is $400,000.
Look , when any payments (unspecific) where made during construction period it is assume that the money is paid for the whole year that it 12 months . Thus we need to calculate the respective amount spent on each of the month of constrution period so we divide the constrution period by 12 months .
To get more clearity refer the below table showing weighted-average accumulated expenditures are on monthly basis.
As per question : Payments of $400,000 were made monthly for four months beginning March 1.
Months ( constrution period = 3 months ie March to May) |
Payment | Working |
Weighted-average Amount ($) |
---|---|---|---|
March | $400,000 | $400,000 * 3 /12 | 100,000 |
April | $400,000 | $400,000 * 2 /12 | 66,667 |
May | $400,000 | $400,000 * 1 /12 | 33,333 |
Jume | $400,000 | Out of constrution period . thus not to allocate | 0 |
Total | $200,000 |