Question

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

Answer:

Agro Co.

The amount of interest to be capitalized is:

= $92,850.

Explanation:

a) Data and Calculations:

Date Payment     Weight        Weighted Average

1/1    $300,000     12/12                  $300,000

4/1     620,000      9/12                    465,000

8/1     460,000      5/12                      191,667

10/1   300,000      3/12                       75,000

Weighted-average accumulated expenditure = $1,031,667

Sources debt:

$750,000 construction loan, 10% annual interest = $75,000

$400,000 note payable, 9% annual interest         =   36,000

$500,000 par value bonds, 7.5% annual interest =   37,500

Total debt = $1,650,000                 Total interest = $148,500

Weighted-average interest rate = $148,500/$1,650,000 * 100 = 9%

Interest to be capitalized = Weighted-average accumulated expenditure * Weighted-average interest rate

= $1,031,667 * 9%

= $92,850