Question

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 30, 2019. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period:
$5,800,000, 6% note
$8,520,000, 10% bonds
Construction expenditures incurred were as follows:

March 31, 2018$3,280,000

June 30, 2018 5,280,000

November 30, 2018 1,656,000

February 28, 2019 2,280,000

The company’s fiscal year-end is December 31.

Required:
Calculate the amount of interest capitalized for 2018 and 2019. (Round weighted average interest rate to 2 decimal places and final answers to the nearest whole dollar.)

Answer 1

Interest capitalisation refers to the interest amount that is added to the cost of the long term assets. Such interest capitalisation amount includes the interest amount of the debt which was financed for acquiring the Assets.

Interest capitalised in 2018 :-

$5800000 * 6% = $348000

$8520000 * 10% = $852000

$14320000 = $1200000

Interest rate =$1200000 / $14320000 = 8.38%

31/3/18: $3280000 × 9/9 = $3280000

30/6/18: $5280000 × 6/9 = $3520000

30/11/18: $1656000 × 1/9 = $184000

$10216000 = $6984000( accumulated expenditure)

Capitalised interest = accumulated expenditure × Interest rate × 9 months / 12 months.

$6984000 ×8.38% × 9/12 = $438944

Interest capitalised in 2019 :-

1/1/19 $10216000 + $438944(10654944)

= $10654944* 4/4 = $10654944

28/02/19 $2280000* 2/4 = $1140000

= $11794944 ( accumulated expenditure)

$11794944 × 8.38% × 4/12 = $329472