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29 July, 06:13

January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 September 1, 2016 December 31, 2016 March 31, 2017 September 30, 2017 $200,000 $300,000 $300,000 $300,000 $200,000 Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2016 and 2017.

Interest capitalized for 2017 was ___.

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  1. 29 July, 09:13
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    Interest capitalized for 2017 = $86,805

    Explanation:

    As per the data given in the question,

    Average expenditure for 2016 = ($200,000*12:12) + ($300,000*4:12) + ($300,000*0:12)

    =$300,000

    Interest capitalized for 2016 = ($200,000*12:12) + ($300,000*4:12) + ($300,000*0:12) * 12%

    = $36,000

    Average expenditure for 2017:

    Accumulated expenditure in 2016 = ($200,000+$300,000+$300,000 + $36,000) * 9:9

    = $836,000

    For March-31,2017 = $300,000*6:9

    = $200,000

    For Sept-30,2017 = $200,000*0:9 = $0

    Average expenditure for 2017 = $836,000 + $200,000 + $0

    = $1,036,000

    Interest capitalized for 2017:

    Specific borrowing = $750,000*9:12*12%

    = $67,500

    Excessive amount = ($1,036,000 - $750,000) * 9:12*9%

    = $19,305

    Interest capitalized for 2017 = $67,500 + $19,305

    = $86,805
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