Question

Early in 2015, Menan Corporation engaged Roberts, Inc. to design and construct a complete modernization of Menan's manufacturing facility. Construction was begun on May 1, 2015. Menan made the following payments to Roberts, Inc. during 2015:

Date	Payment
May 1, 2015	$34,000,000
August 31, 2015	$56,000,000
December 31, 2015	$31,000,000

In order to help finance the construction, Nolan issued the following during 2015:

1. $12,000,000 of 10-year, 9% bonds payable, issued at par on May 1, 2015, with interest payable annually on May 1.

2. 20,000,000 shares of no-par common stock, issued at $10 per share on May 1, 2015.

In addition to the 9% bonds payable, the only other debt outstanding during 2015 was an $8,000,000, 12% note payable dated January 1, 2012 and due January 1, 2022, with interest payable annually on January 1.

What is the total amount to be debited to the 'Manufacturing Facility' account during the year 2015?

Answer 1

Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
Date	Capitalization Expenditures	Period	Weighted-Average Accumulated Expenditures
May 1, 2015	$ 34,000,000	8/12	$ 22,666,667
August 31, 2015	$ 56,000,000	4/12	$ 18,666,667
December 31, 2015	$ 31,000,000	0	$ 0
			$ 41,333,333

Avoidable interest incurred during 2015
Weighted-Average Accumulated Expenditures	Appropriate Interest Rate	Avoidable Interest
12000000	9%	1,080,000.00
$ 29,333,333	12%	3,520,000.00
$ 41,333,333		4,600,000.00

Actual interest incurred during 2015:
9% bonds payable, $12,000,000*9%*8/12	720,000.00
12% note payable, $8,000,000*12%	960,000.00
	1,680,000.00

Total amount to be debited to the 'Manufacturing Facility' account during the year 2015
Avoidable interest incurred during 2015	4,600,000.00
Less: Actual interest incurred during 2015:	-1,680,000
	2,920,000.00