Question

Indigo Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Indigo since 2012. Indigo’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Indigo now carries CDs in addition to books. On June 1, 2017, Indigo contracted with Black Construction to have a new building constructed for $ 5,040,000 on land owned by Indigo. The payments made by Indigo to Black Construction are shown in the schedule below. Date Amount July 30, 2017 $ 1,134,000 January 30, 2018 1,890,000 May 30, 2018 2,016,000 Total payments $ 5,040,000 Construction was completed and the building was ready for occupancy on May 27, 2018. Indigo had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year. 10%, 5-year note payable of $ 2,520,000, dated April 1, 2014, with interest payable annually on April 1. 12%, 10-year bond issue of $ 3,780,000 sold at par on June 30, 2010, with interest payable annually on June 30. The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Compute the weighted-average accumulated expenditures on Indigo’s new building during the capitalization period. Weighted-Average Accumulated Expenditures $ eTextbook and Media Compute the avoidable interest on Indigo’s new building. (Round intermediate percentage calculation to 1 decimal place, e.g. 15.6% and final answer to 0 decimal places, e.g. 5,125.) Avoidable Interest $ eTextbook and Media Some interest cost of Indigo Inc. is capitalized for the year ended May 31, 2018. Compute the amount of each items that must be disclosed in Indigo’s financial statements. Total actual interest cost $ Total interest capitalized $ Total interest expensed $

Answer 1

A.)
July 30, 2017	$1134,000 x 10/12	$945,000
January 30, 2018	$1,890,000 x 4/12	$630,000
May 30, 2018	$2016,000 x 0	0
$1,575,000
B.)
$2,520,000 × 10%	$252,000
$3,780,000 × 12%	453600
$6300000	$705,600
Average Rate	705600/6300000	11.20%
Avoidable Interest to be capitalized
$1575000*11.20%	$176,400
Total Actual Interest	$705,600
Total Interest Capitalized	$176,400
Total Interest Expense	$529,600
($705600-$176400)