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
Business   Accounting   
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Homework Answers

Answer #1

Answer:

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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