Capitalization of Interest the following three situations involve the capitalization of interest. Situation I On January 1,


Capitalization of Interest the following three situations involve the capitalization of interest.

Situation I

On January 1, 2010, Columbia, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2010, to finance the construction cost, Columbia borrowed $4,000,000 payable in 10 annual installments of $400,000, plus interest at the rate of 10%. During 2010, Columbia made deposit and progress payments totaling $1,500,000 under the contract; the weighted-average amount of accumulated expenditures was $900,000 for the year. The excess borrowed funds were invested in short-term securities, from which Columbia realized investment income of $250,000.What amount should Columbia report as capitalized interest at December 31, 2010?

Situation II

During 2010, Evander Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

                                                                                                                                  Interest Costs


Warehouse constructed for Evander’s own use                                                    $30,000

Special-order machine for sale to unrelated customer, produced according

  to customer’s specifications                                                                                        9,000

Inventories routinely manufactured, produced on a repetitive basis 8,000 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

Antonio, Inc. has a fiscal year ending April 30. On May 1, 2010, Antonio borrowed $10,000,000 at 11% 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 April 30, 2011, expenditures for the partially completed structure totaled $6,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $650,000 for the year. How much should be shown as capitalized interest on Antonio’s financial statements at April 30, 2011?

(CPA adapted)

Financial Statements
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A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Related Book For  answer-question

Intermediate Accounting

ISBN: 978-0470423684

13th Edition

Authors: Donald E. Kieso, Jerry J. Weygandt, And Terry D. Warfield

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