Question

On January 1, 2016, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $308,000 September 1, 2016 $456,000 December 31, 2016 $456,000 March 31, 2017 $456,000 September 30, 2017 $308,000 Dreamworld had $5,200,000 in 12% bonds outstanding through both years. Dreamworld's capitalized interest in 2016 was: Multiple Choice $36,960. $64,440. $55,200. $73,920.

Answer 1

Answer:

C) $55,200

Explanation:

Step 1: Calculate the Accumulated Expenditure of Dreamworld Co. using the Weighted Average Method

Expenditure date        Amount              Months                  Total (Amt x Months

January 1 2016            $308,000          12/12                         $308,000

September 1, 2016       $456,000         4/12                          $152,000

December 1, 2016        $456,000         0/12                           $0

The Accumulated Expenditure                                             $460,000

Step 2: Having calculated the accumulated expenditure, the next step is to determine the capitalized interest for 2016

Capitalized Interest = Interest on Outstanding Bonds x Average Accumulated Expenditure (calculated in step 1)

= 12% x $460,000

= 0.12 x 460,000

= $55,200