Question

XYZ Corp began construction on a building on January 1, 2016. On that date, it made its first $500,000 payment. An additional $600,000 were paid on 4/1/2016 and $300,000 was paid on 7/1/2016. A final payment of $100,000 was made on 12/31/2016, which is also the date when the construction project was finished and the building was ready to use.

To finance the project, XYZ Corp issued a $800,000 10% note. Furthermore, XYZ Corp had a $2,000,000 5% note outstanding that was not specifically related to the construction project. Both Notes were outstanding for the entire construction project.

What are the weighted average accumulated expenditures on the construction project?

Answer 1

Weighted Average accumulated expenditures

Weighted average accumulated expenditure is the amounts incurred on construction during the period multiplied by number of months remain in that period.

And it is calculated to calculate the amount of interest to be capitalized on self-construction assets

1. Calculation of weighted average accumulated expenditures

Period of Contract = January 1, 2016 –December 31, 2016 i.e. 12 months

Date of expenditure (A)	Amount of expenditure (B)	Period outstanding from the date of expenses ( C)	Weighted average accumulated expenditure (D) = {B*C/12}
1/1/2016	500,000	12 months	500,000
4/1/2016	600,000	9 months	450,000
7/1/2016	300,000	6 months	150,000
12/31/2016	100,000	0 months	0
Total weighted average accumulated expenditure			1,100,000

Additional Info:

Calculation of Actual Interest
Specific debt : 800,000*10%	80,000
General debt: 2,000,000*5%	100,000
Total Actual Interest	180,000

Calculation of Avoidable Interest

Weighted Average Accumulated Expenditure	Rate of Interest	Amount of Avoidable Interest
800,000	10%	80,000
300,000	5%	15,000
1,100,000		95,000

Avoidable Interest is less than actual interest.

Amount of interest to be capitalized is $95,000