Question: The following three situations involve the capitalization of interest Situation I

The following three situations involve the capitalization of interest.

Situation I
On January 1, 2014, Navarone, Inc. signed a fixed-price contract to have Homeward Construction construct a major plant facility at a cost of $8,000,000. It was estimated that it would take 2 years to complete the project. Also on January 1, 2014, to finance the construction cost, Navarone borrowed $8,000,000 payable in 8 annual installments of $1,000,000, plus interest at the rate of 8%. During 2014, Navarone made deposit and progress payments totaling $3,000,000 under the contract; the weighted-average amount of accumulated expenditures was $1,200,000 for the year. The excess borrowed funds were invested in short-term securities, from which Navarone realized investment income of $175,000.

What amount should Navarone report as capitalized interest at December 31, 2014?

Situation II
During 2014, Holibox Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Interest Costs
Factory constructed for Holibox’s own use ............... $41,000
Inventories routinely manufactured, produced on a repetitive basis .. 7,800
Special-order machine for sale to unrelated customer, produced according
to customer’s specifications .................. 3,500
All of these assets required an extended period of time for completion.

Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III
Angelo, Inc. has a fiscal year ending June 30. On July 1, 2014, Angelo borrowed $5,000,000 at 10% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended June 30, 2015, expenditures for the partially completed structure totaled $1,500,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $121,000 for the year.

How much should be shown as capitalized interest on Angelo’s financial statements at June 30, 2015?
(CPA adapted)

  • CreatedJune 07, 2013
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