X company started construction of a new office building for its own use at an estimated cost of $5 000 000 on January 1, 2022, and completed the construction on December 31, 2022. During the year of construction (2022) the company had outstanding the following debt obligations. i. Specific Construction Debt: $2 000 000 12% note issued December 31, 2021. Interest payable semiannually Other Debt: $1 400 000 10% short-term loan. Interest payable monthly and principal payable at maturity on May 30, 2023 $1 000 000 11% long-term loan. Interest payable on January 1 of each year and principal payable at maturity on January 1, 2025 Total expenditures - $5 200 000 Weighted average accumulated expenditures - $3 500 000 One of the accounting interns on the other team having reviewed the statement of financial position commented that it just did not make any sense… this ’avoidable interest’…. In reality, isn’t all interest unavoidable …. No one lends money without expecting to be compensated for it. The accountant has asked your team to explain to the intern of the other team the treatment for interest capitalization when accounting for self-constructed assets. In preparing your presentation notes be sure to address the following. Paragraph citations are to be provided with answers where applicable. 1. Compute the amount of interest to be capitalized. Provide detailed workings. Round to 2 decimal places (using ias borrow cost format) 2. What was the capitalized cost of the new office building on the statement of financial position?
X company started construction of a new office building for its own use at an estimated cost of $5 000 000 on January 1, 2022, and completed the construction on December 31, 2022.
During the year of construction (2022) the company had outstanding the following debt obligations. i. Specific Construction Debt: $2 000 000 12% note issued December 31, 2021. Interest payable semiannually
Other Debt: $1 400 000 10% short-term loan. Interest payable monthly and principal payable at maturity on May 30, 2023
$1 000 000 11% long-term loan. Interest payable on January 1 of each year and principal payable at maturity on January 1, 2025
Total expenditures - $5 200 000
Weighted average accumulated expenditures - $3 500 000 One of the accounting interns on the other team having reviewed the
The accountant has asked your team to explain to the intern of the other team the treatment for interest capitalization when accounting for self-constructed assets. In preparing your presentation notes be sure to address the following. Paragraph citations are to be provided with answers where applicable.
1. Compute the amount of interest to be capitalized. Provide detailed workings. Round to 2 decimal places (using ias borrow cost format)
2. What was the capitalized cost of the new office building on the statement of financial position?
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