ABC contracted with a company to build a storage warehouse in 2014. Construction
ID: 2713969 • Letter: A
Question
ABC contracted with a company to build a storage warehouse in 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: ABC borrowed $100,000 on January 1 specifically for this project at 8% interest. ABC had the following nonspecific borrowings outstanding during the year: 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
A.CALCULATION OF INTEREST TO BE CAPITALISED ON BUILDING
STEP 1.WEIGHED AVERAGE INTEREST RATES:
STEP 2: AVERAGE CUMULATIVE EXPENDITURE:
INTEREST COST TO BE CAPITALISED:
SPECIFIC BORROWING COST=$1,00,000*8%=$8,000
GENERAL BORROWING COST=($1,13,333-$1,00,000)*9.75%=$1,300
TOTAL INTEREST COST TO BE CAPITALISED=$9,300
B.ENDING BALANCE IN BUILDING ACCOUNT AT THE END OF 2014
EXPENSES INCURRED=$(50,000+75,000+85,000+45,000+50,000)=$3,05,000
ADD:INTEREST TO BE CAPITALISED =$9,300
ENDING BALANCE IN BUILDING ACCOUNT =$3,14,300
BORROWINGS AMOUNT($) INTEREST RATE INTEREST COST($) SPECIFIC 1,00,000 8% 8,000 NONSPECIFIC 30,00,000 11% 3,30,000 10,00,000 6% 60,000 40,00,000 3,90,000/40,00,000=9.75% 3,90,000