Question

On December 31, 2019, Windsor Inc. borrowed $3,780,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $453,600; June 1, $756,000; July 1, $1,890,000; December 1, $1,890,000. The building was completed in February 2021. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2013, interest payable annually $5,040,000 6-year, 11% note, dated December 31, 2017, interest payable annually $2,016,000 2. March 1, 2020, expenditure included land costs of $189,000 3. Interest revenue earned in 2020 $61,740 Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building. The amount of interest $

Answer 1

Solution 1:

Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01-Mar	$4,53,600	10/12	$3,78,000
01-Jun	$7,56,000	7/12	$4,41,000
01-Jul	$18,90,000	6/12	$9,45,000
01-Dec	$18,90,000	1/12	$1,57,500
Total	$49,89,600		$19,21,500
*Interest rate			13%
Interest capitalized in 2020			$2,49,795

Solution 2:

Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$37,80,000	13%	$4,91,400
14% Bond	$50,40,000	14%	$7,05,600
11% Note	$20,16,000	11%	$2,21,760
Total interest incurred			$14,18,760
Less: Interest Capitalized			$2,49,795
Interest Expense			$11,68,965

Date	Accounts Title	Debit	Credit
31-Dec	Building	$2,49,795
	Interest expense	$11,68,965
	Cash		$14,18,760