Question

XYZ Corp began construction on a building on January 1, 2016. On that date, it made its first $500,000 payment. An additional $600,000 were paid on 4/1/2016 and $300,000 was paid on 7/1/2016. A final payment of $100,000 was made on 12/31/2016, which is also the date when the construction project was finished and the building was ready to use. To finance the project, XYZ Corp issued a $800,000 10% note. Furthermore, XYZ Corp had a $2,000,000 5% note outstanding that was not specifically related to the construction project. Both Notes were outstanding for the entire construction project. What is the value of the Building on the 12/31/2016 Balance Sheet of XYZ Corp?

Answer 1

Weighted average payment : [500000*12/12]+[600000*12/12]+[300000*12/12]

                = 1,400,000

**payment of $ 100,000 made on 12/31/2016 is outstanding for 0 month since made on last day of year (no interest accrued)

Interest on specific loan to capitalised : 800000*.10 = 80000

Interest on General loan to be capitalised : [1,400,000-800,000]*.05 = 30,000

Total interest to be capitalised during construction period : 80000+30000 = 110000

the value of the Building on the 12/31/2016 Balance Sheet of XYZ Corp : Total payment made +interest capitalised

              = [500000+600000+300000+100000] + 110000

              = 1,500,000 +110,000

              = 1,610,000