Wordcrafters Inc. is a book distributor that had been operating in its original facility since I988. The increase in certification progran1s and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Wordcrafters since 2008. Wordcrafters’ original facility became obsolete by early 20I4 because of the increased sales volume and the fact that Wordcrafters now carries audio books and DVDs in addition to books.
On June 1, 2014, Wordcrafters contracted with Favre Construction to have a new building constructed for $5 million on land owned by Wordcrafters. Wordcrafters made the following payments to Favre Construction:
Date Amount
July 30, 2014 ............ $1,200,000
Jan. 30, 2015 ............ 1,500,000
May 30, 2016 ............. 1,300,000
Total payments ........... $4,000,000
Construction was completed and the building was ready for occupancy on May 27, 20I5. Wordcrafters had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 201 5, the end of its fiscal year:
14 ½ %. five-year note payable of $2 million, dated April 1, 2011, with interest payable annually on April 1 12%, 10-year bond issue of $3 million sold at par on June 30, 2007, with interest payable annually on June 30 The company is an international distributor and thus prepares financial statements in accordance with IFRS.
Instructions
(a) Calculate the weighted-average accumulated expenditures on Wordcrafters' new building during the capitalization period.
(b) Calculate the avoidable interest on Wordcrafters' new building.
(c) Wordcrafters Inc. capitalized some of its interest costs for the year ended May 31, 2015:
1. Identify the item(s) relating to interest costs that must be disclosed in Wordcrafters' financial statements.
2. Calculate the amount of the item(s) that must be disclosed.