Question

On January 1, 2021, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The only interest-bearing debt the company had outstanding during 2021 was long-term bonds with a book value of $11,000,000 and an effective interest rate of 8%. Construction expenditures incurred during 2021 were as follows:

January 1 $600,000
March 1 660,000
July 31 540,000
September 30 700,000
December 31 400,000

Required:
Calculate the amount of interest capitalized for 2021.

Answer 1

Answer:

The amount of interest capitalized for 2021 is $124,000

Explanation:

First, we need to calculate the weighted expenditure by the time period it spent in the period.

The weighted expenditure calculation is made in the PDF file attached with this answer please find it.

Weights are calculated as follow

January 1 = 12/12 = 1

March 1 = 10/12 = 0.83  

July 31 = 5/12 = 0.42

September 30 = 3/12 = 0.25

December 31 = 0/12 = 0

The amount of Interest capitalized is calculated as follow

Amount of Interest capitalized = Weighted average expenditure x Interest rate = $1,550,000 x 8% = $124,000