Question

# On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished...

On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2019. Expenditures on the project were as follows:

 January 1, 2018 \$ 300,000 September 1, 2018 \$ 450,000 December 31, 2018 \$ 450,000 March 31, 2019 \$ 450,000

Dreamworld had the following debt obligations outstanding during both years:

Construction loan, 10%             \$500,000

Long-term note, 12%                      \$2,500,000

Required: What would Dreamworld's capitalized interest be in 2018?

 \$45,000 \$134,000 \$52,500 \$50,000 None of the above

Capitalized Interest in Year 2018 is \$52500.

Explanation:

Computation of weighted average accumulated expenditure:

 Payment Date Expenditure (A) Capitalization period (B) Weight (C=B/12) Weighted Expenditure(A*C) Jan 01,2018 \$300000 12 month 12/12 \$300000 Sep 01,2018 \$450000 4 month 4/12 \$150000 Dec 31 , 2018 \$450000 0 month 0 0 \$450000

Computation of weighted average interest Rate:

 Loan Principal Interest Rate Annual interest Construction Loan \$500000 10 % \$50000 Long Term Note \$2500000 12% \$300000 \$3000000 \$350000

Weighted Average interest Rate = Total interest / Total Principal = \$350000/\$3000000= 11.6667%

Capitalized Interest in 2018 = \$450000 x 11.6667% = \$52500

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