Alta Company is constructing a production complex that qualifies for interest capitalization. The following information is available:

Capitalization period: January 1, 2019, to June 30, 2020 Expenditures on project: 2019: January 1 $ 564,000 May 1 513,000 October 1 708,000 2020: March 1 1,608,000 June 30 672,000 Amounts borrowed and outstanding: $1.7 million borrowed at 10%, specifically for the project $8 million borrowed on July 1, 2018, at 12% $11 million borrowed on January 1, 2017, at 6% Required:

Note: Round all final numeric answers to two decimal places.

Compute the amount of interest costs capitalized each year. Capitalized interest, 2019 $ fill in the blank 1 Capitalized interest, 2020 $ fill in the blank 2 If it is assumed that the production complex has an estimated life of 25 years and a residual value of $0, compute the straight-line depreciation in 2020. $ fill in the blank 3 Since GAAP requires accrual accounting, if a company capitalizes interest during the construction period it will report higher income than if it had not capitalized interest. In future periods, the same company will report lower income than if it had not capitalized interest. Feedback Area Feedback 1. To determine the amount of interest that should be capitalized, a company should follow these four steps: Step 1: Determine the weighted average accumulated expenditures for the period. Weighted-average accumulated expenditures are defined as the sum of the construction expenditures weighted by the amount of time that interest cost could have been incurred on those expenditures during the construction period. It is common for the construction project to extend beyond the end of a company's fiscal year. In this situation, the procedure shown previously is repeated for the subsequent year with one adjustmentthe total expenditures plus capitalized interest from the previous year is considered to be an outstanding expenditure as of the first day of the subsequent year. Step 2: Determine the appropriate interest rate. The selection of an interest rate is based on the relationship between the weighted average accumulated expenditures and the amounts borrowed specifically for construction. If the weighted average accumulated expenditures are less than or equal to the funds borrowed specifically to finance the construction of a qualifying asset, the company uses the interest rate on that specific borrowing. If the weighted average expenditures on the asset are greater than the specific borrowing or if no specific borrowing is made, the company uses both the interest rate on the specific borrowing and a weighted average interest rate on all other borrowings. Step 3: Compute avoidable interest by applying the appropriate interest rate(s) to the weighted average accumulated expenditures. Step 4: Capitalize the lesser of avoidable interest or actual interest. The total amount of interest cost that a company capitalizes each period may not exceed the actual interest cost incurred. The following partially completed table will help you organize your calculations for this exercise.

2013 Expenditures Portion of Year Outstanding Weighted Average Accumulated Expenditures Jan. 1 $564,000 x 12/12 = $564,000 May. 1 513,000 x ? = ? Oct. 1 708,000 x ? = ? Total $1,785,000 x ? 2. a. Total costs = Expenditures + Capitalized interest b. Depreciation begins when an asset is placed into service. 3. The company does not report the capitalized amount of interest as interest expense during the construction period. Therefore, the company will report higher income than it otherwise would if it had expensed the full amount of interest. In addition, all things being equal, the capitalized interest will result in higher depreciation expense in future periods and lower net income. Check My Work