Situation I On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract
ID: 2468219 • Letter: S
Question
Situation I
On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,220,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2014, to finance the construction cost, Oksana Baiul borrowed $4,220,000 payable in 10 annual installments of $422,000, plus interest at the rate of 10%. During 2014, Oksana Baiul made deposit and progress payments totaling $1,582,500 under the contract; the weighted-average amount of accumulated expenditures was $843,999 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $263,000.
What amount should Oksana Baiul report as capitalized interest at December 31, 2014? (Round answer to the nearest whole dollar, e.g. 5,275.)
Situation II
During 2014, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Interest Costs Incurred
All of these assets required an extended period of time for completion.
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
Situation III
Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2014, Peggy Fleming borrowed $10,340,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2015, expenditures for the partially completed structure totaled $7,238,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $672,100 for the year.
How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2015?
$
Explanation / Answer
Situation I
Answer: $84,401—The requirement is the amount Oksana Baiul should report as capitalized interest at 12/31/14. The amount of interest eligible for capitalization is
Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest
Since Oksana Baiul has outstanding debt incurred specifically for the construction project, is an amount greater than the weighted-average accumulated expenditures of $843,999, the interest rate of 10% is used for capitalization purposes. Therefore, the avoidable interest is $84,401, which is less than the actual interest.
$843,999 X .10 = $84,401
Finally, per FASB Statement No. 62, the interest earned of $263,000 is irrelevant to the question addressed in this problem because such interest earned on the unexpended portion of the loan is not to be offset against the amount eligible for capitalization.
Situation II.
Answer $43,120—The requirement is total interest costs to be capitalized. FASB Statement No. 34 identifies assets which qualify for interest capitalization: assets constructed for an enterprise’s own use and assets intended for sale or lease that are produced as discrete projects. Inventories that are routinely produced in large quantities on a repetitive basis do not qualify for interest capitalization. Therefore, only $33,300 and $9,820 are capitalized.
Situation III
Answer :$398,090—The requirement is to determine the amount of interest to be capitalized on the financial statements at April 30, 2008. The requirements of the FASB Statement No. 34 are met: (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred. The amount to be capitalized is determined by applying an interest rate to the weighted-average amount of accumulated expenditures for the asset during the period. Because the $7,238,000 of expenditures incurred for the year ended April 30, 2015, were incurred evenly throughout the year, the weighted-average amount of expenditures for the year is $3619,000, ($7,238,000 ÷ 2). Therefore, the amount of interest to be capitalized is $398,090 ($3619,000 X 11%). In any period the total amount of interest cost to be capitalized shall not exceed the total amount of interest cost incurred by the enterprise. (Total interest is $1,137,400). Finally, per FASB Statement No. 62, the interest earned of $672,100 is irrelevant to the question addressed in this problem because such interest earned on the unexpended portion of the loan is not to be offset against the amount eligible for capitalization.