On January 1, 2016, Randolf Company signed a contract to have Rory Associates co
ID: 2595514 • Letter: O
Question
On January 1, 2016, Randolf Company signed a contract to have Rory Associates construct a manufacturing facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2016, to finance the construction cost, Randolf borrowed $14,000,000 payable in seven annual installments of $2,000,000 plus interest at the rate of 9%. During 2016, Randolf made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Randolf realized investment income of $330,000. What amount should Randolf report as capitalized interest at December 31, 2016?
a. $ 0 b. $ 270,000 c. $ 510,000 d. $1,260,000
Explanation / Answer
Actual interest=14000000*9%=1260000 Avoidable interest=Weighted average accumulated expenditure*interest rate=3000000*9%=270000 Interest to be capitalized=Lower of actual interest or avoidable interest=Lower of 1260000 or 270000=270000 Answer is b. $270000