Interest During ConstructionMatrix Inc. borrowed $1,100,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2019, and was completed on October 31, 2019. Expenditures related to this building were:January 1$258,000(includes cost of purchasing land of $150,000)May 1320,000 July 1450,000 October 31275,000 In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.Required:Compute the amount of interest capitalized related to the construction of the building.$If the expenditures are assumed to have been incurred evenly throughout the year:Compute weighted average accumulated expenditures$Compute the amount of interest capitalized on the building$

Question
Asked Nov 28, 2019
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  1. Interest During Construction

    Matrix Inc. borrowed $1,100,000 at 8% to finance the construction of a new building for its own use. Construction began on January 1, 2019, and was completed on October 31, 2019. Expenditures related to this building were:

    January 1 $258,000 (includes cost of purchasing land of $150,000)
    May 1 320,000  
    July 1 450,000  
    October 31 275,000  

    In addition, Matrix had additional debt (unrelated to the construction) of $500,000 at 9% and $800,000 at 10%. All debt was outstanding for the entire year.

    Required:

    1. Compute the amount of interest capitalized related to the construction of the building.
      $
    2. If the expenditures are assumed to have been incurred evenly throughout the year:
      Compute weighted average accumulated expenditures
      $

      Compute the amount of interest capitalized on the building
      $
 
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Expert Answer

Step 1

1. Capitalized interest-construction loan of $1,100,000:

Portion of year
outstanding
10/12 (January 1-
October 31)
Weighted average
accumulated expenditures
Expenditures
X
$258,000
January 1
215,000
X
=
6/12 (May 1
October 31)
Маy 1
$320,000
160,000
X
4/12 (July1-October
31)
0/12 (October 31
October 31)
July
$450,000
150,000
X
October 31
$275.000
0
X
$1,303.000
525,000
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Portion of year outstanding 10/12 (January 1- October 31) Weighted average accumulated expenditures Expenditures X $258,000 January 1 215,000 X = 6/12 (May 1 October 31) Маy 1 $320,000 160,000 X 4/12 (July1-October 31) 0/12 (October 31 October 31) July $450,000 150,000 X October 31 $275.000 0 X $1,303.000 525,000

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Step 2

Note: Interests costs (if any) capitalized are included as a part of the cost of the building, not the part of the land.

Step 3

Calculate the avoidable inte...

Totalof weighted average accumulated
Avoidable interest=|
expenditures Percentage of interest
=$525,000x8%
=$42,000
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Totalof weighted average accumulated Avoidable interest=| expenditures Percentage of interest =$525,000x8% =$42,000

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