P$10\mathrm{.}7($LO $2)($Capitalization of Borrowing Costs$)$ Laserwords A$..$ is a book distributor that had

been operating in its original facility since $1985.$ The increase in certification programs and

continuing education requirements in several professions has contributed to an annual growth rate

of $15\%$ for Laserwords since $2017.$ Laserwords' original facility became obsolete by early $2022$

because of the increased sales volume and the fact that Laserwords now carries CDs in addition to

books.

On June $1,2022,$ Laserwords contracted with Black Construction to have a new building constructed

for $$4,000,000$ on land owned by Laserwords. The payments made by Laserwords to Black

Construction are shown in the schedule below.

Construction was completed, and the building was ready for occupancy on May $27,2023.$

Laserwords had no new borrowings directly associated with the new building but had the following

debt outstanding at May $31,2023,$ the end of its fiscal year.

$10\%,5-$year note payable of $$2,000,000,$ dated April $1,2019,$ with interest payable annually

on April $1.$

$12\%,10-$ year bond issue of $$3,000,000$ sold at par on June $30,2015,$ with interest payable

annually on June $30.$

The new building qualifies for capitalization of borrowing costs. The effect of capitalizing the interest

on the new building, compared with the effect of expensing the interest, is material.

Instructions

a$.$ Compute the average carrying amount on Laserwords' new building during the

capitalization period.

b$.$ Compute the borrowing cost to be capitalized on Laserwords' new building.