Question

On January 1, 2018, ABC Company began construction of a building to be used as its warehouse. The building was completed on November 1, 2019. Expenditures for the project during 2018 were as follows:

January 1, 2018	900,000
April 1, 2018	700,000
July 1, 2018	650,000
October 1, 2018	840,000

On January 1, 2018, ABC Company obtained a $4,000,000 construction loan with 9% interest rate payable in 5 years. The Company’s other debts included a note of $1,000,000 at 11% interest rate for 3 years and a bond of $5,000,000 at 7% interest rate for 10 years.

Instructions:

Calculate the weighted average amount of accumulated expenditures for the building at December 31, 2018.

Calculate the amount of interest that ABC Company should capitalize in 2018.

Answer 1

Required details as computed below:

Interest Capitalized
		Months outstanding	Average Investment
Jan-01	900,000	10	750,000
Apr-01	700,000	7	408,333
Jul-01	650,000	4	216,667
Oct-01	840,000	1	70,000
Weighted average amount of accumulated expenditures			1,445,000
Total Interest Exp
4,000,000*9%	360000
1,000,000*11%	110000
5,000,000*7%	350000
Total Interest Expense	820,000
Capitalized Interest (1,445,000*9%)	130,050