ABC contracted with a company to build a storage warehouse m 2014 Construction b
ID: 2451022 • Letter: A
Question
ABC contracted with a company to build a storage warehouse m 2014 Construction began on April 1 at which time ABC paid $50,000. ABC then made additional payments as follows, based on progress made towards completion of the structure: June 1 $75,000 Sept 1 $85,000 Dec 1 $45,000 Dec. 31 $50,000 ABC borrowed $100,000 on January 1 specifically for this project at 8% interest ABC had the following nonspecific borrowings outstanding during the year: 11% $3 million loan 6% $1 million loan How much interest should be capitalized on this building? What is the ending balance in the Building account at the end of 2014?Explanation / Answer
Step 1:-
Computation of average acumulated expenses
Note:- Assuming the year ends on 31 December. So the year consisting of 12 months (1 Jan to 31 Dec.) Accordingly the weighted factor ( 9/12. 7/12, 4/12, 1/12, 0 etc.) are considered.
Step 2:-
Compute the average interest rate based on outstanding debt of entity other than specific borrowings.
3000000 * 11% = 330000 [ 3 Milion = 3000000 $ ]
1000000 * 6% = 60000 [ 1 Milion = 1000000 $ ]
4000000 390000
Average interest rate = 390000 / 4000000 = .0975 i.e., 9.75%
Step 3
Compute the interest on average accumulated expenses
A. Interest to be capitalized on Building = $ 9300
Step 4:-
Compute actual interest costs incurred during the year
100000 * 8% = 8000
3000000 * 11% = 330000
1000000 * 6% = 60000
398000
Amount to be capitalized is not more than actual interest costs.
Building A/c Dr. 314300 (305000 + 9300)
To Cash A/c 314300
B. Ending balance in the building account at the end of year 2014 = 314300 (305000 + 9300)
50000 * 9 /12 (April - December) 37500 75000 * 7 /12 ( June - December) 43750 85000 * 4/12 (Sept. - December) 28333 (approx) 45000 * 1/12 (December) 3750 50000 * 0 ( as it is on 31 December) - $ 305000 Average accumulated expenses 113333 (approx)