Question

Interest During Construction

Matrix Inc. borrowed $1,000,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2016, and was completed on October 31, 2016. Expenditures related to this building were:

January 1	$252,000	(includes cost of purchasing land of $150,000)
May 1	310,000
July 1	420,000
October 31	276,000

In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.

Required:

Compute the amount of interest capitalized related to the construction of the building.

= $ 40,400

If the expenditures are assumed to have been incurred evenly throughout the year:

Compute weighted average accumulated expenditures

= $ 629,000

Compute the amount of interest capitalized on the building

$ __________

Answer 1

1) Compute the amount of interest capitalized related to the construction of the building

Solution:

Expenditures Portion Outstanding Weighted average

Jan-01 252,000 10/12 210,000

May-01 310,000 6/12 155,000

Jul-01 420,000 4/12 140,000

Oct-31 276,000 0/12 0

505,000 * 8 % = 40,400

Actual interest

1,000,000 8% 80,000

500,000 9% 45,000

800,000 10% 80,000

205,000

As avoidable interest is less than actual interest thus 40,400 will be capitalized

2) -- Compute weighted average accumulated expenditures: $ 629,000

Working: 1,258,000 / 2 = 629,000

-- Compute the amount of interest capitalized on the building: $50,320

Working: 629,000 * 0.08 = 50,320