Question

Self-Constructed Assets

a. Parker Inc borrowed $50,000 at 12% on 1/1/2020 to finance the construction of a building. Construction began on 1/1/2020 and expenditures of $100,000 were paid in five equal installments of$20,000 on 3/31, 5/31, 8/31, 9/30, and 12/31. What is the capitalized cost of the building?

Step 1: Does the asset qualify?

Step 2: What is the cap period?

Step 3:

Date	Amount	Cap Period	WAAE
3/31
5/31
8/31
9/30
12/31

Avoidable Interest:

Actual Interest:

Capitalized Interest:

b. Assume the same facts except that Parker borrows $15,000. Also, Parker has additional debt (unrelated to construction) of $100,000 at 10% and $200,000 at 15%. What is the capitalized cost of the building?

c. How would your answer to part (a) or (b) change if Parker used IFRS?

d. Assume that Parker incurs the $100,000 of expenditures evenly throughout the year. What is WAAE (weighted-average accumulated expenditures)?

Answer 1

a) Capitalized cost of the building is $106000

Avoidable interest is $3500

Actual Interest is $6000

Capitalized interest is $6000

b) Int. would be $1800 (both actual and capitalized)

Avoidable interest would be $1050

Capitalized cost is $101800