Question

The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division used $14,000,000 and the Electric Lamp Division used $6,000,000 for expansion. The Electric Mixer Division has $10,000,000 of revenue, the Electric Lamp Division has $6,000,000 of revenues Interest costs on the bond totaled $1,500,000 for the year. What amount of interest costs should be allocated to the Electric Mixer Division based on their usage of the bond proceeds for expansion? What amount of interest costs should be allocated to the Electric Lamp Division based on their usage of the bond proceeds for expansion? What amount of interest costs should be allocated to the Electric Mixer Division based on their revenues? What amount of interest costs should be allocated to the Electric Lamp Division based on their revenues?

Answer 1

Answer :

(1) Amount of interest cost to be allocated to Electric Mix Division based on their usage of bond Proceeds for Expansion =(Total Interest Cost / Total Proceeds from Bond) X usage of bond Proceeds By Electric Mix Division

= $ 1,500,000/ ( $ 20,000,000) X $ 14,000,000 = $ 10,50,000

(2) Amount of interest cost to be allocated to Electric Lamp Division based on their usage of bond Proceeds for Expansion = (Total Interest Cost / Total Proceeds from Bond) X usage of bond Proceeds By Lamp Division

= $ 1,500,000/ ( $ 20,000,000) X $ 6,000,000 = $ 4,50,000

(3) Amount of interest cost to be allocated to Electric Mix Division based on their Revenue

= (Total Interest Cost / Total Revenue) X Revenue of Electric Mix Division

= $ 1,500,000/ ( $ 16,000,000) X $ 10,000,000 = $ 9,37,500

(4) Amount of interest cost to be allocated to Electric Lamp Division based on their Revenue

= (Total Interest Cost / Total Revenue) X Revenue of Lamp Division

= $ 1,500,000/ ( $ 16,000,000) X $ 6,000,000 = $ 5,62,500

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