Question

Situation I On January 1, 2017, Tamarisk, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,215,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Tamansk borrowed $4,215 000 Payable in 10 annual installments of $421 500 plus interest at the rate of 10% During 2017 Tamarisk made deposit and progress Payments totaling S1 580,625 under the contract; the weighted average amount of accumulated expenditures was $843,000 for the year. The excess borrowed funds were invested in short-term securities, from which Tamarisk realized investment income of $256,400. What amount should Tamarisk report as capitalized interest at December 31, 20172 Capitalized interest Situation II During 2017, Vaughn C constructed and manufactured certain assets and incurred the following interest costs in connection with those activities. Interest Costs Incurred Warehouse constructed for Vaughn's own use 31,800 Special-order machine for sale to unrelated customer, produced according Inventories routinely manufactured, produced on a repetitive basis 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? The total amount of interest costs to be capitalized 8,330 8,750 Situation III Bramble, Inc. has a fiscal year ending April 30. On May 1, 2017, Bramble borrowed牛9,898,000 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, 2018, expenditures for the partially completed structure totaled $6,928,600. These expenditures were incurred evenly throughout the year, Interest earned on the unexpended portion of the loan amounted to $643,370 for the year. How much should be shown as capitalized interest on Bramble's financial statements at April 30, 2018? Capitalized interest on Bramble's financial statements

Answer 1

Situation I.
$0—The requirement is the amount Tamarisk should report as capitalized interest at 12/31/17. The amount of interest eligible for capitalization is

        Weighted-Average Accumulated Expenditures × Interest Rate = Avoidable Interest

Since Tamarisk has outstanding debt incurred specifically for the construction project, in an amount greater than the weighted-average accumulated expenditures of $843,000, the interest rate of 10% is used for capitalization purposes. Therefore, the avoidable interest is $0, which is less than the actual interest, computed as interest on specific borrowing less investment income on those funds:

        ($843,000 × 0.10 = $84,300) - $256,400 Investment Income

Situation II.
$40,130—The requirement is total interest costs to be capitalized. IFRS 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 $31,800 and $8,330 are capitalized

$0—The requirement is to determine the amount of interest to be capitalized on the financial statements at April 30, 2018. The IFRS requirements 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 $6,928,600 of expenditures incurred for the year ended April 30, 2018, were incurred evenly throughout the year, the weighted-average amount of expenditures for the year is $3,464,300, ($6,928,600 ÷ 2). Therefore, the amount of interest to be capitalized is $ Nil [($3,464,300 × 11%) – $643,370 (interest earned)]. 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.