Ocean wide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified as a separate discrete job in the accounting records. At the end of 2012, Ocean wide correctly reported $5,400,000 as Construction in Progress on the following jobs.
Ship..........................Completion Date (end of month) .........Accumulated Costs
(including 2012 interest)
December 31, 2012
340 . . . . . . .. . . .......................... . . . October 31, 2012*.................... $2,300,000
341 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2013....................... 1,150,000
342 . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2013....................... 1,200,000
343 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 31, 2014......................... 750,000
*Ship 340 was completed and ready for use in October 2012 and will be placed in service May 1, 2013.
Construction costs for 2013, and the dates the expenditures were made, were as follows:
Ship ..............................................................Date............. Costs
341 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 1, 2013..... $1,200,000
342 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . May 1, 2013...... 1,600,000
343 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... July 1, 2013....... 2,200,000
344 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2013........ 810,000
345 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1, 2013........ 360,000
Ocean wide had the following general liabilities at December 31, 2013:
12%, 5-year note (maturity date-2015) . . . . . . . . . . . . . . . . .. . . . . $2,000,000
10%, 10-year bonds (maturity date-2018). . . . . . . . . . . . . . . . . . . . 8,000,000
On January 1, 2013, Ocean wide borrowed $2,000,000 specifically for the construction of ship 343. The loan was for three years with interest at 13%.
Instructions:
1. Compute the maximum interest that can be capitalized in 2013.
2. Compute the weighted-average interest rate for the general liabilities for 2013.
3. Compute the interest that Ocean wide should capitalize during 2013.