1.
Interest Capitalization:
Interest capitalization refers to the interest amount that is added to the cost of the long-term asset. Such interest capitalization amount includes the interest amount of the debt which was financed for acquiring the asset.
To Calculate: The amount of interest that Company M should capitalize in the year 2018 and 2019 using the weighted average method.
1.
Explanation of Solution
Calculate the amount of interest that Company M should capitalize in the year 2018 using the weighted average method.
Determine the average accumulated expenditures.
Month | Construction Expenditure ($) | Interest Outstanding (Number of months) | Accumulated Expenditure ($) | ||
January 1, 2018 | 100,000 | = | 1,000,000 | ||
March 1, 2018 | 600,000 | = | 500,000 | ||
June 30, 2018 | 800,000 | = | 400,000 | ||
October 1, 2018 | 600,000 | = | 150,000 | ||
Accumulated expenditures (before interest) | $3,000,000 | ||||
Average accumulated expenditures | $2,050,000 |
Table (1)
Determine the weighted average rate of all other interest-bearing debts.
Amount ($) | Interest rate | Interest Amount ($) | |||
Accumulated expenditures | $3,000,000 | 10% | = | 300,000 | |
Long-term note 6% | $4,000,000 | 6% | 240,000 | ||
Long-term note 8% | $6,000,000 | 8% | = | 480,000 | |
Total | $13,000,000 | 1,020,000 |
Table (2)
Working Note:
Determine the weighted-average interest rate.
Determine the capitalized interest.
Calculate the amount of interest capitalized in the year 2019.
Determine the average accumulated expenditures.
Month | Construction Expenditure | Interest Outstanding | Accumulated Expenditure | ||
January 1, 2019 | 3,160,925 | = | 3,160,925 | ||
January 31, 2019 | 270,000 | = | 240,000 | ||
April 30, 2019 | 585,000 | = | 325,000 | ||
August 31, 2019 | 900,000 | = | 100,000 | ||
Accumulated expenditures (before interest) | 4,915,925 | ||||
Average accumulated expenditure | 3,825,925 |
Table (3)
Determine the weighted average rate of all other debt.
Amount ($) | Interest rate | Interest Amount ($) | |||
Expenditure | $3,000,000 | 10% | = | 300,000 | |
Long-term note 6% | $4,000,000 | 6% | 240,000 | ||
Long-term note 8% | $6,000,000 | 8% | = | 480,000 | |
Total | $13,000,000 | 1,020,000 |
Table (4)
Working Note:
Determine the weighted-average interest rate.
Determine the capitalized interest.
Thus, the amount of interest capitalized in the year 2018 and 2019 is $160,925 and $225,251 respectively.
2.
The cost of the building.
2.
Explanation of Solution
Determine the total cost of the building.
Particulars | Amount ($) |
Accumulated expenditure before interest capitalization as on September 30, 2019 |
4,915,925 |
Add: Interest capitalization as on 2019 | 225,251 |
Total cost of building | 5,141,176 |
Table (5)
Hence, the total cost of the building is the total cost of the building is $5,141,176.
3.
To Calculate: The amount of interest expense that will appear in the 2018 and 2019 income statements.
3.
Explanation of Solution
2018 | 2019 | |
Amount ($) | Amount ($) | |
300,000 | 300,000 | |
240,000 | 240,000 | |
480,000 | 480,000 | |
Total interest capitalized | 1,020,000 | 1,020,000 |
Less: Interest capitalized | (160,925) | (225,251) |
Interest expense | 859,075 | 794,749 |
Table (6)
Hence, the amount of interest expense that will appear in the income statement for the years 2018 and 2019 are $859,075 and $794,749 respectively.
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Chapter 10 Solutions
INTERMEDIATE ACCT.(LL)W/CONNECT ACCESS
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- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT