Question: Sportswear, Inc. decided to construct a new small building for additional work capacity. On February 1, 2028, Sportswear signed a contract to construct a new
Sportswear, Inc. decided to construct a new small building for additional work capacity. On February 1, 2028, Sportswear signed a contract to construct a new building for $2,000,000 on land already owned. Construction started on July 1, 2028. The payments to the contractor are as follows:
Date Amount
August 1, 2028 $500,000
November 30, 2028 840,000
April 30, 2028 660,000
Construction was completed and the building was ready for use on December 1, 2028. Sportswear borrowed $1,500,000 on July 1, 2028, to complete the project. The construction loan was a 3-year loan, with an 8% interest rate. In addition, Sportswear had the following debt outstanding for the full year of 2028.
8%, 10-year note payable of $1,000,000, dated January 1, 2025, with interest payable on December 31.
6%, 20-year bond issue of $2,000,000 sold at par on July 1, 2027, with interest payable annually on December 31.
The new building qualifies for capitalization of interest.
- Compute weighted-average accumulated expenditures.
- Compute avoidable interest
- Compute actual interest
- Identify the amount of interest to be capitalized and the amount of interest to be expensed
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Answer a Weighted average expenditure 718333 b Avoidable interest 47912 c Actual interest 260000 d capitalizable interest 47912 interest expense 212088 The problem is an example of BORROWING COSTS Bor... View full answer
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