Question

ABC Co. would like to construct a new office complex. On January 1, 2017 ABC Co. borrowed $3,000,000 at 10% payable annually to finance the construction of the new complex. During 2017, ABC Co. made the following expenditures directly related to the construction project: April 1, $400,000 July 1, $1,800,000 October 1, $2,000,000 December 31, $1,000,000 The construction was completed in March, 2018. There were other debts outstanding during 2017 as follows: 10-year, 12% note payable, dated January 1, 2015. $2,000,000 5 year, 8%, $4,000,000 bond payable, January 1, 2010, interest payable annually. Determine the amount of interest to be capitalized in 2017 for the construction project

Answer 1

Solution:

Construction of Building - ABC Co.
Schedule of Weighted-Average accumulated expenditure
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
1-Apr-17	$400,000.00	9/12	$300,000.00
1-Jul-17	$1,800,000.00	6/12	$900,000.00
1-Oct-17	$2,000,000.00	3/12	$500,000.00
31-Dec-17	$1,000,000.00	0/12	$0.00
	$5,200,000.00		$1,700,000.00

Specific borrowings for entire year = $3,000,000

Rate of interest on specific borrowings = 10%

As weighted average expenditure is lesser than specific borrowing amount, therefore general borrowings will not be considered for interest capitalization.

Amount of interest to be capitalized = $1,700,000*10% = $170,000