Pharoah Inc. is a book distributor that had been operating in
its original facility since 1987. The increase in certification
programs and continuing education requirements in several
professions has contributed to an annual growth rate
of 15% for Pharoah since 2012. Pharoah’ original
facility became obsolete by early 2017 because of the increased
sales volume and the fact that Pharoah now carries CDs in addition
to books.
On June 1, 2017, Pharoah contracted with Black Construction to have
a new building constructed for $ 5,280,000 on land owned by
Pharoah. The payments made by Pharoah to Black Construction are
shown in the schedule below.
|
Date |
Amount |
||
| July 30, 2017 |
$ 1,188,000 |
||
| January 30, 2018 |
1,980,000 |
||
| May 30, 2018 |
2,112,000 |
||
| Total payments |
$ 5,280,000 |
||
Construction was completed and the building was ready for occupancy
on May 27, 2018. Pharoah had no new borrowings directly associated
with the new building but had the following debt outstanding at May
31, 2018, the end of its fiscal year.
| 10%, 5-year note payable of $ 2,640,000, dated April 1, 2014, with interest payable annually on April 1. |
| 12%, 10-year bond issue of $ 3,960,000 sold at par on June 30, 2010, 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.
(a)
Compute the weighted-average accumulated expenditures on Pharoah’s new building during the capitalization period.
| Weighted-Average Accumulated Expenditures |
$ |
Answer : Weighted-average accumulated expenditures = $1,650,000
Explanation :
Computation of weighted-average accumulated expenditures
| Dates | Amount ($) (A) | Capitalization Rate (B) | Weighted-average accumulated expenditures (A*B) | ||
|---|---|---|---|---|---|
| July 30, 2017 | 1,188,000 | 10/12 | (1,188,000 * 10/12) = 990,000 | ||
|
|
4/12 | (1,980,000 * 4/12) = 660,000 | ||
| May 30, 2018 | 2,112,000 | 0 | (2,112,000 * 0) = 0 | ||
| Weighted-average accumulated expenditures | $1,650,000 | ||||
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