On January 1,2013, ABC contracted with XYZ Construction to have a new building c
ID: 2458737 • Letter: O
Question
On January 1,2013, ABC contracted with XYZ Construction to have a new building constructed for $2,400,000 on land owned by ABC. The payments made by ABC to XYZ Construction are shown in the following schedule: Construction was completed and the building was ready for occupancy on December 31, 2013. ABC's has the following debt outstanding at December 31, 2013. 15% 3-year note payable of $1,000,000 to finance purchase construction of the building, dated January 1, 2013, with interest payable annually on December 31 10% 5-year note payable of $1,200,000, dated April 1, 2011, with interest payable annually on April 1 12% 10-year bond issue of $4,000,000 sold at par on June 30, 2007, with interest payable annually on June 30 The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest is material. Compute the weighted-average accumulated expenditures on ABC's new building during the capitalization period. Compute the avoidable interest on ABC's new building, (round to the nearest one decimal point i.e. 12.3%) Total Actual Interest Cost Total Interest Capitalized Total Interest ExpensedExplanation / Answer
Solution of Required :
(a) The weighted - average accumulated expenditures on ABC's ner building during the capitalization period is:
Full year used fund :$750,000
6 months used fund ; $500,000
3 months used fund ; $ 650,000
So, the weighted average accmulated expenditures
= 6/12 * 750000 + 3/12 *1,250,000 + 3/12 * 1,900,000 + 0/12 * 2,400,000
= $1,162,500
(b). The avoidable interest on ABC's new building :
Note payable taken on 1 Jan, 2013 $1,000,000. The amount utilized for construction purpose on 1 Jan, 2013 is $750,000. Next payment for the construction was on 30 June, 2013. The un-utilized fund for 6 months @15% was $250,000.
The interest which could be avoided = $250,000 * 15% * 6/12 = $18750
Total Interest on the 15% 3yr Note for construction = $150,000
Percentage of avoidable interest on ABC's new building = $18750 / $150,000 = 12.5%
(c) Compute:
1. Total Actual Interest Cost: $150,000 + 120,000 + 480,000 = $750,000
2. Total Interest Capitalized = $150,000 - 18750 (interest not for construction) = $131,250
3. Total Interest Expensed = $750,000 - $131,250 = $618,750