Question

24) A firm began the construction of its new manufacturing facility in January of 20x2. The following expenditures were made on construction in that year: Jan. 1 $40,000 Mar. 1 120,000 Oct. 31 96,000 Debt outstanding the entire year: 6%, $60,000 construction loan 4%, $90,000 note payable not related to construction 6%, $90,000 note payable not related to construction Compute interest to be capitalized using the weighted average method. Use the specific borrowing rate followed by the average interest rate of all other interest bearing debts.

Answer 1

$8,190

Step-by-step explanation:

Expenditures:

Jan 1: $40,000

Mar 1: $120,000

Oct 31: $96,000

Average accumulated expenditures:

= Expenditure in 1st Jan + Expenditure in 1st Mar ×
`(10 months)/(12 months)` + Expenditure in 31st Oct ×
`(2 months)/(12 months)`

= $40,000 + $120,000×
`(10)/(12)` + $96,000×
`(2)/(12)`.

= $156,000

Loan:

6%, $60,000 construction loan

4%, $90,000 note payable not related to construction

6%, $90,000 note payable not related to construction

The average interest rate by weighted average method:

[($60,000×6%)+($90,000×4%) +($90,000×6%)] /($60,000+$90,000+$90,000) = 5.25%

Interest capitalized = average interest rate × average accumulated expenditures = 5.25%×$156,000 = $8,190.