Question

Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2017 and was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during 2017: Date June 1, 2017 August 31, 2017 December 31, 2017 Payment $6,156,000 9,168,000 7,404,000 In order to help finance the construction, Dobbs issued the following during 2017: 1. $5,190,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest payable annually on May 31. 2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2017 In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $1,260,000, 12% note payable dated January 1, 2013 and due January 1, 2023, with interest payable annually o January 1. Compute the amounts of each of the following: 1. Weighted average accumulated expenditures qualifying for capitalization of interest cost. 2. Avoidable interest incurred during 2017. 3. Total amount of interest cost to be capitalized during 2017. 1. Weighted average accumulated expenditures 2. Avoidable interest 3. Amount of interest cost to be capitalized Click if you would like to Show Work for this question: Open Show Work

Answer 1

Solution 1:
Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 June 2017	$61,56,000	7/12	$35,91,000
31 August 2017	$91,68,000	4/12	$30,56,000
31 December 2017	$74,04,000	0/7	$0
Total	$2,27,28,000		$66,47,000

Solution 2:

Computation of Avoidable Interest
Debt	Weighted Average Accumulated Expenditures	Interest rate	Avoidable Interest amount
From 9% Bond	$51,90,000	9%	$4,67,100
From 12% Note	$12,60,000	12%	$1,51,200
Totals	$64,50,000		$6,18,300

Solution 3:

Computation of Actual Interest cost incurred
Debt	Weighted Average Accumulated Expenditures	Interest rate	Actual Interest
From 9% Bond (for 7 months)	$51,90,000	9%	$2,72,475
From 12% Note	$12,60,000	12%	$1,51,200
Totals	$64,50,000		$4,23,675
Total amount of Interest cost to be capitalized for 2017 (Lower of actual interest or Avoidable interest)			$4,23,675