Question

4. A building was constructed last year for Agro Co. for use as a production facility. Construction began on January 1 and was completed on December 31. The payments to the contractor were as follows.

Date	Payment
1/1	$300,000
4/1	620,000
8/1	460,000
10/1	300,000

To finance construction of the building, a $750,000, 10% construction loan was taken out on January 1. The loan was repaid on December 31. The firm had two sources of general debt: $400,000 note payable, 9% annual interest, and $500,000 par value bonds, 7.5% annual interest.

Determine the amount of interest to be capitalized.

Answer 1

Solution:

Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Jan	$300,000	12/12	$300,000
1-Apr	$620,000	9/12	$465,000
1-Aug	$460,000	5/12	$191,667
1-Oct	$300,000	3/12	$75,000
Total	$1,680,000		$1,031,667
Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
9% Note	$400,000	9.00%	$36,000
7.50% Note	$500,000	7.50%	$37,500
Totals	$900,000		$73,500
Weighted average rate (total interets/ total debt)	8.17%

amount of interest to be capitalized = ($750,000*10%) + ($1,031,667 - $750,000)* 8.17%

= $75,000 + $23,012

= $98,012