On April 1, Paine Co. began construction of a small building. Payments of $180,000 were made monthly for four months beginning on April 1. The building was completed and ready for occupancy on August 1. For the purpose of determining the amount of interest cost to be capitalized, calculate the weighted-average accumulated expenditures on the building by completing the schedule below:
Date Expenditures Capitalization Period Weighted-Average Expenditures
Question 2
On March 1, Mocl Co. began construction of a small building. The following expenditures were incurred for construction:
March 1 $ 150,000 April 1 $ 148,000
May 1 360,000 June 1 540,000
July 1 200,000
The building was completed and occupied on July 1. To help pay for construction $100,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $1,000,000, 10% note issued two years ago.
Instructions
(a) Calculate the weighted-average accumulated expenditures.
(b) Calculate avoidable interest.
The Correct Answer and Explanation is :
Let’s break down both questions step by step.
Question 1: Paine Co.
To calculate the weighted-average accumulated expenditures for Paine Co., we need to determine when each payment was made and for how long it was outstanding.
- April 1: $180,000 for 4 months (April to July)
- May 1: $180,000 for 3 months (May to July)
- June 1: $180,000 for 2 months (June and July)
- July 1: $180,000 for 1 month (July)
Now, we can multiply each expenditure by the fraction of the year it was outstanding:
- April 1 payment (4 months out of 12 months)
$180,000 × (4/12) = $60,000 - May 1 payment (3 months out of 12 months)
$180,000 × (3/12) = $45,000 - June 1 payment (2 months out of 12 months)
$180,000 × (2/12) = $30,000 - July 1 payment (1 month out of 12 months)
$180,000 × (1/12) = $15,000
Total Weighted-Average Accumulated Expenditures:
$60,000 + $45,000 + $30,000 + $15,000 = $150,000
So, the weighted-average accumulated expenditures on the building are $150,000.
Question 2: Mocl Co.
Now, let’s calculate the weighted-average accumulated expenditures for Mocl Co.
Expenditures and Periods:
- March 1: $150,000 for 5 months (March to July)
- April 1: $148,000 for 4 months (April to July)
- May 1: $360,000 for 3 months (May to July)
- June 1: $540,000 for 2 months (June and July)
- July 1: $200,000 for 1 month (July)
Calculations of Weighted-Average Accumulated Expenditures:
- March 1 payment (5 months out of 12 months)
$150,000 × (5/12) = $62,500 - April 1 payment (4 months out of 12 months)
$148,000 × (4/12) = $49,333.33 - May 1 payment (3 months out of 12 months)
$360,000 × (3/12) = $90,000 - June 1 payment (2 months out of 12 months)
$540,000 × (2/12) = $90,000 - July 1 payment (1 month out of 12 months)
$200,000 × (1/12) = $16,666.67
Total Weighted-Average Accumulated Expenditures:
$62,500 + $49,333.33 + $90,000 + $90,000 + $16,666.67 = $308,500
So, the weighted-average accumulated expenditures on the building are $308,500.
(b) Calculate Avoidable Interest
Step 1: Calculate the total interest expense for the period
We can calculate avoidable interest using the weighted-average accumulated expenditures and the borrowing costs. Mocl Co. has two loans:
- $100,000 loan at 12% (March 1) for the construction, which is related to the building.
- $1,000,000 loan at 10% used for general purposes, unrelated to the construction.
The avoidable interest is the amount of interest that could have been avoided if the company had only used the borrowed funds for the construction.
Step 2: Calculate interest on the construction loan:
Interest on the $100,000 loan is straightforward:
- $100,000 × 12% = $12,000 per year
For the weighted average of $308,500 in expenditures, we multiply this amount by the interest rate:
- Avoidable interest = $308,500 × 12% = $37,020 for the period
Thus, the avoidable interest to be capitalized is $37,020.
Let me now generate the image summarizing this.
Here is the detailed table summarizing the weighted-average accumulated expenditures and avoidable interest calculations for both Paine Co. and Mocl Co. Let me know if you need any further clarifications!
