Question

# Ship-Builders Co. began construction of a new cutter for the U.S. Coast Guard on January 1,...

Ship-Builders Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on March 31, 2019. To help finance construction, Ship-Builders took out an \$8,000,000, 2-year, 7% loan on January 1, 2018. Interest on the loan was to be paid annually at the end of each year and the principal at the end. Ship-Builders has no other outstanding interest-bearing debt. Ship-Builders made the following expenditures in conjunction with this construction project:

 Date Amount 2/1/2018 \$ 1,200,000 3/1/2018 650,000 4/1/2018 600,000 8/1/2018 1,100,000 10/1/2018 700,000 11/1/2018 800,000 3/1/2019 2,500,000

How much interest should Ship-Builders Co. capitalize in 2018? How much should they expense in 2018?

As per Accounting standards of borrowing cost, if an loan or debt taken specifically for funding of qualifying assest then amount of interest capitalised should be actual cost incurred less any income earned by temporary investment of these funds related to that loan or debt.

In present case, loan of \$ 80,00,000 taken specifically for construction of the ship.Hence whole interest cost should be capitalise by ship builders co.and not any cost should be expensed off in 2018.

Total cost to be capitalise= \$ 80,00,000*7%*1 year = \$560000

Total interest to be expensed off =NIL

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