On January 1, 2016, Kendall Inc. began construction of an automated cattle feede
ID: 2470700 • Letter: O
Question
On January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2017. Expenditures on the project were as follows:
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2016 and 2017.
Interest capitalized for 2017 was ?
Explanation / Answer
Solution:
Average accumulated expenditures for 2016 was:
= (200,000 * 12/12) + (300,000 * 4/12) + (300,000 * 0/12)
= 200,000 + 100,000 + 0
= 300,000
Interest capitalized for 2016 was:
= [(200,000 * 12/12) + (300,000 * 4/12) + (300,000 * 0/12)] * 12%
= [300,000] * 12%
= 36,000
Average accumulated expenditures for 2017 was:
Accumulated expenditure in 2016 = (200,000 + 300,000 + 300,000 + Interest capitalized 36,000) * 9/9
= (836,000) * 9/9
= 836,000
March 31, 2017 = 300,000 * 6/9 = 200,000
September 30, 2017 = 200,000 * 0/9 = 0
Average accumulated expenditures for 2017 was = 836,000 + 200,000 + 0 = 1,036,000
Interest capitalized for 2017 was:
Specific borrowing = 750,000 * 9/12 * 12% = 67,500
Excess = (Accumulated expenditure in 2017) 1,036,000 – (Total borrowing in 2016) 750,000
= 286,000 * 9/12 * 9% = 19,305
Interest capitalized for 2017 = 67,500 + 19,305 = 86,805