Question

# XYZ Corp began construction on a building on January 1, 2016. On that date, it made...

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?

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

 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