Question

Interest during Construction

Dexter Construction Corporation is building a student condominium complex; it started construction on January 1, Year 1. Dexter borrowed $1 million specifically for the project by issuing a 10%, 5-year, $1 million note, which is payable on December 31 of Year 3. Dexter also had a 12%, 5-year, $3 million note payable and a 10%, 10-year, $1.8 million note payable outstanding all year.

In Year 1, Dexter incurred costs as follows:

Interest during Construction Dexter Construction Corporation is building a student condominium complex; it started construction on January 1, Year 1. Dexter borrowed $1 million specifically for the project by issuing a 10%, 5-year, $1 million note, which is payable on December 31 of Year 3. Dexter also had a 12%, 5-year, $3 million note payable and a 10%, 10-year, $1.8 million note payable outstanding all year. In Year 1, Dexter incurred costs as follows: January 1 $280,000 March 1 540,000 June 30 1,000,000 November 1 420,000 Calculate Dexter's capitalized interest on the student condominium complex for Year 1.

Calculate Dexter's capitalized interest on the student condominium complex for Year 1.

Required:

Prepare the journal entry to record Hemingway’s acquisition of the equipment.

Answer 1

Solution:

Year 1: Weighted-Average accumulated expenditure and interest capitalized
Date	Expenditure	Weigh	Avearge
01-Jan	$2,80,000	12/12	$2,80,000
01-Mar	$5,40,000	10/12	$4,50,000
30-Jun	$10,00,000	6/12	$5,00,000
01-Nov	$4,20,000	2/12	$70,000
Accumulated Expenditure	$22,40,000		$13,00,000
Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
12% Note	$30,00,000	12%	$3,60,000
10% Note	$18,00,000	10%	$1,80,000
Totals	$48,00,000		$5,40,000
Weighted average rate (total interets/ total debt)		11.25%
Year 1: Interest Capitalized
		Average	Interest Rate	Capitalized Interest
Avearge Accumulated Expenditure		$13,00,000
Specific		$10,00,000	10.00%	$1,00,000
Other debt		$3,00,000	11.25%	$33,750
Total Interest Capitalized				$1,33,750