Question 1 Early in 2014, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs’s manufacturing facility. Construction was begun on June 1, 2014 and was completed on December 31, 2014. Dobbs made the following payments to Kiner, Inc. during 2014:
Date Payment
1-Jun-14 $5,796,000
31-Aug-14 8,928,000
31-Dec-14 7,464,000
In order to help finance the construction, Dobbs issued the following during 2014:
1. $5,060,000 of 10-year, 9% bonds payable, issued at par on May 31, 2014, with interest payable annually on May 31.
2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2014 I
n addition to the 9% bonds payable, the only debt outstanding during 2014 was a $1,294,000, 12% note payable dated January 1, 2010 and due January 1, 2020, with interest payable annually on 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 2014.
3. Total amount of interest cost to be capitalized during 2014.
1. Weighted-average accumulated expenditures $
2. Avoidable interest $
3. Amount of interest cost to be capitalized $
1. Weighted-average accumulated expenditures $
Weighted-average accumulated expenditures will be calculated as follow.Construction was begun on June 1, 2014 and was completed on December 31, 2014.So it is period of 7 months.Dobbs made the following payments to Kiner, on frequent date so calculation is as follow.
| Date | Capitalization
expenditure |
period | Weighted Avg
accumulted exp |
| 1-june | 5,796,000 | 7/12 | 3381000 |
| 31-Aug | 8,928,000 | 4/12 | 2976000 |
| 31-dec | 7,464,000 | 0 | 0 |
| 6357000 |
2. Avoidable interest incurred during 2014
Avoidable interest incurred during 2014 will be calculated as follow.
| Weighted Avg
Accumulted Exp |
Interest rate | Avoidable interest |
| 5060000 | .09 | 455400 |
| 1297000 | .12 | 155640 |
| 6357000 | 611040 |
3. Total amount of interest cost to be capitalized during 2014
The calculation of total amount of interest cost to be capitalized during 2014 will as follow
Actual interest incurred during 2014
9% bonds payable, $50600,000 × .09 × 7/12 265650
12% note payable, $1,294,000 × .12 155280
Total 420930
The interest cost to be capitalized is $420,930 (the lesser of the $611,040 avoidable interestand the $420,930 actual interest cost).
