Question

On January 2, 2014, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2015. Expenditures for the construction were as follows: Indian River Groves borrowed $2,200,000 on a construction loan at 12% interest on January 2, 2014. This loan was outstanding during the construction period. The company also had $8,000,000 in 9% bonds outstanding in 2014 and 2015. The interest capitalized for 2014 was:

Answer 1

The interest capitalized for 2014 for the construction of the new citrus processing plant by Indian River Groves is $264,000, calculated based on the construction loan interest at 12% annually.

Step-by-step explanation:

The question at hand relates to the concept of interest capitalization during the construction of a new asset in accounting. When a company constructs a new plant, the interest on debt specific to the construction and any other existing debt can be capitalized and added to the cost of the constructed asset up to the weighted average accumulated expenditures of construction. In other words, the interest expense that would otherwise be recognized in the income statement can be included in the cost of the plant up to the amount of interest that would have been incurred had the expenditures been made for the plant at the beginning of the period.

To calculate the interest capitalized for the year 2014, we need to look at two things: the interest from the construction loan and the interest on any other debt that could reasonably be said to have been used to finance the construction. Given that Indian River Groves borrowed $2,200,000 on a construction loan at 12% interest on January 2, 2014, the interest for the year would be $2,200,000 * 12% = $264,000. No mention is made of any other debts being specifically associated with the construction, hence only the interest on the construction loan is considered for capitalization here.

Therefore, the interest capitalized for Indian River Groves in the year 2014 for the construction of the new citrus processing plant would be $264,000.

Answer 2

the expenditures are missing, so I looked for a similar question:

• 1/2/2014 $400,000
• 7/1/2014 $1,200,000
• 12/31/2014 $1,200,000
• 3/31/2015 $1,200,000
• 9/30/2015 $800,000

Weighted average expenditures for 2014:

January 1 = $400,000 x 1 = $400,000

July 1 = $1,200,000 x 1/6 = $600,000

December 31 = $1,200,000 x 0 = $0

total = $1,000,000

Since the company borrowed $2,200,000 specifically for this construction project, then capitalized interests = $1,000,000 x 12% = $120,000