Question

Early in 2020, Qatar Corporation engaged Emirate Ltd. to design and construct a complete modernization of Qatar’s manufacturing facility. Construction began on June 1, 2020, and was completed on December 31, 2020. Qatar made the following payments to Emirate Ltd. during 2020: Date Payment June 1, 2020$ 3,300,000 August 31, 20204,800,000 December 31, 20204,000,000 In order to help finance the construction, Qatar issued the following during 2020: 1.$ 2,000,000, ten-year, 9% bonds payable, issued at par on May 31, 2020, with interest payable annually on May 31, 2.1,000,000 common shares, issued at $ 10 per share on October 1, 2020. In addition to the 9% bonds payable, the only other debt outstanding during 2020 was a $ 700,000, 12% note payable dated January 1, 2019, and due January 1, 2022, with interest payable annually on January 1. Instructions Calculate the amounts of each of the following (show calculations): a)weighted-average accumulated expenditures qualifying for capitalization of interest cost, b)avoidable interest incurred during 2020, c)total amount of interest cost to be capitalized during 2020.

Answer 1

Date	Expenditures	Period in Fraction	Weighted-Average
June 1	3,300,000	7/12	1,925,000
August 31	4,800,000	4/12	1,600,000
December 31	4,000,000	0/12	-
Weighted-Average Accumulated Expenditures			3,525,000
	Weighted-Average Accumulated Expenditures	Applicable Interest rate	Avoidable Interest
Full amount	2,000,000	9%	180,000
3525000-2000000	1,525,000	12%	183,000
	3,525,000		363,000
Avoidable Interest			363,000
Actual interest incurred during year 2020
Debt type	Interest rate	Amount	Remarks
Bond Payable	9%	105,000	2000000*9%*7/12
Note payable	12%	84,000	700000*12%
Actual interest incurred during year 2020		189,000
Avoidable Interest			363,000
Actual interest incurred			189,000
Interest cost to be capitalized (Whichever is lower)			189,000