Question

Early in 2015, Logan Corporation engaged Reese, Inc. to design and construct a complete modernization of Logan's manufacturing facility. Construction was begun on January 1, 2015 and was completed on December 31, 2015. Logan made the following payments to Reese, Inc. during 2015:

Date	Payment
June 1, 2015	$2,400,000
August 31, 2015	3,600,000
December 31, 2015	3,000,000

In order to help finance the construction, Logan issued $2,000,000 of 10-year, 9% bonds payable, issued at par on January 2, 2015, with interest payable annually on December 31.

In addition to the 9% bonds payable, the only debt outstanding during 2015 was a $500,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on January 1 and a $1,000,000, 10% bond payable dated July 1, 2011 due June 30, 2021 with interest paid annually.

Compute the amounts of each of the following (show computations):

1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost. Hint: $2,600,000

2. Interest to be capitalized in 2015. Logan uses the specific interest method. Hint: $244,200

              

Answer 1

Solution 1:

Solution 1:
Weighted-Average accumulated expenditure and interest capitalized
Date	Expenditure	Weigh	Avearge
01 June 2015	$24,00,000	7/12	$14,00,000
31 August 2015	$36,00,000	4/12	$12,00,000
31 December 2015	$30,00,000	0/12	$0
Accumulated Expenditure	$90,00,000		$26,00,000

Weighted-average accumulated expenditures = $2,600,000

Solution 2:

Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
12% note payable	$5,00,000	12%	$60,000
10% Bond	$10,00,000	10%	$1,00,000
Totals	$15,00,000		$1,60,000
Weighted average rate (total interets/ total debt)		10.67%
Year 2018: Interest Capitalized
		Average	Interest Rate	Capitalized Interest
Avearge Accumulated Expenditure		$26,00,000
Specific		$20,00,000	9.00%	$1,80,000
Other debt		$6,00,000	10.67%	$64,020
Total Interest Capitalized				$2,44,020