Question

Matrix Inc. borrowed $1,000,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2016, and was completed on October 31, 2016. Expenditures related to this building were: January 1 $258,000 (includes cost of purchasing land of $150,000) May 1 310,000 July 1 420,000 October 31 275,000 In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.

Required: Compute the amount of interest capitalized related to the construction of the building.

If the expenditures are assumed to have been incurred evenly throughout the year: Compute weighted average accumulated expenditures

Compute the amount of interest capitalized on the building.

Answer 1

Solution :

Construction of Building - Matrix Inc.
Schedule of Weighted-Average accumulated expenditure
Date	Expenditure	Capitalization Period	Weighted Average Accumulated Expenditures
1-Jan	$258,000.00	10/12	$215,000
1-May	$310,000.00	6/12	$155,000
1-Jul	$420,000.00	4/12	$140,000
1-Oct	$275,000.00	1/12	$22,917
	$1,263,000.00		$532,917

Specific loan outstanding during the year = $1,000,000

Therefore amount of interest capitalized = $532,917 * 8% = $42,633