Question

Marin Inc. is a book distributor that had been operating in its original facility since 1990. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Marin since 2015. Marin’ original facility became obsolete by early 2020 because of the increased sales volume and the fact that Marin now carries CDs in addition to books.

On June 1, 2020, Marin contracted with Black Construction to have a new building constructed for $5,280,000 on land owned by Marin. The payments made by Marin to Black Construction are shown in the schedule below.

Date		Amount
July 30, 2020		$1,188,000
January 30, 2021		1,980,000
May 30, 2021		2,112,000
Total payments		$5,280,000

Construction was completed and the building was ready for occupancy on May 27, 2021. Marin had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2021, the end of its fiscal year.

10%, 5-year note payable of $2,640,000, dated April 1, 2017, with interest payable annually on April 1.

12%, 10-year bond issue of $3,960,000 sold at par on June 30, 2013, 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.

Weighted-Average Accumulated Expenditures

$ 1650000

Avoidable interest $184800

A. Some interest cost of Marin Inc. is capitalized for the year ended May 31, 2021. Compute the amount of each items that must be disclosed in Marin’s financial statements.

Total actual interest cost		$
Total interest capitalized		$
Total interest expensed

Answer 1

Calcuation of Weighted Average Borrowing Cost Rate:

S.No	Borrowings	Rate Per Anum	Interest
A	$2,640,000	10%	$264,000
B	$3,960,000	12%	$475,200
A+B	$6,600,000		$739,200

(A) Total Interest Cost = $7,39,200

Weighted Average  Borrowing Cost Rate = $739200/6600000*100 = 11.2%

Calculation of amount to be capitalised out of General Borrowings:

Eligible Borrowing Cost = Average amount invested   *   Weighted Average
Into asset                                 borrowing Cost Rate

= $1650000*11.2% = $184800

(B) Amount to be Capitalised = $1,84,800

(C) Interest Amount Expensed = $739200-$184800 = $5,54,400