
1.
Interest Capitalization:
Interest capitalization refers to the interest amount that is added to the cost of the long-term asset. Such interest capitalization amount includes the interest amount of the debt which was financed for acquiring the asset.
To Calculate: The amount of interest that Company M should capitalize in 2016 and 2017 using the specific interest method.
1.

Explanation of Solution
Calculate the amount of interest capitalized in the year 2016.
Month | Construction Expenditure ($) | Interest Outstanding (Number of months) | Accumulated Expenditure ($) | ||
January 1, 2016 | 100,000 |
|
|
= | 1,000,000 |
March 1, 2016 | 600,000 |
|
|
= | 500,000 |
June 30, 2016 | 800,000 |
|
|
= | 400,000 |
October 1, 2016 | 600,000 |
|
= | 150,000 | |
Accumulated expenditures (before interest) | $3,000,000 | ||||
Average accumulated expenditures | $2,050,000 |
Table (1)
Determine the capitalized interest.
Calculate the amount of interest capitalized in the year 2017.
Month | Construction Expenditure | Interest Outstanding | Accumulated Expenditure | ||
January 1, 2017 | 3,205,000 |
|
|
= | 3,205,000 |
January 31, 2017 | 270,000 |
|
|
= | 240,000 |
April 30, 2017 | 585,000 |
|
|
= | 325,000 |
August 31, 2017 | 900,000 |
|
|
= | 100,000 |
Accumulated expenditures (before interest) | 4,960,000 | ||||
Average accumulated expenditure | 3,870,000 |
Table (2)
Determine the weighted average rate of all other debt.
Amount ($) | Interest rate | Interest Amount ($) | |||
Long-term note 6% | $4,000,000 |
|
6% | = | 240,000 |
Long-term note 8% | $6,000,000 |
|
8% | = | 480,000 |
Total | $10,000,000 | 720,000 |
Table (3)
Working Note:
Determine the weighted-average interest rate.
Determine the amount of difference.
Determine the interest on amount of difference.
Determine the interest on amount on the construction loan.
Determine the capitalized interest.
Hence, the amount of interest capitalized in the year 2016, and 2017 are $205,000, and $271,980 respectively.
2.
The total cost of the building.
2.

Explanation of Solution
Determine the total cost of the building.
Particulars | Amount ($) |
Accumulated expenditures as on September 30, 2017 before interest capitalization |
4,960,000 |
Add: Interest capitalization as on 2017 | 271,980 |
Total cost of building | 5,231,980 |
Table (4)
Hence, the total cost of the building is $5,231,980.
3.
To Calculate: The amount of interest expense that will appear in the 2016 and 2017 income statements.
3.

Explanation of Solution
Calculate the amount of interest expense for 2016 and 2017.
2016 | 2017 | |
Amount ($) | Amount ($) | |
|
300,000 | 300,000 |
|
240,000 | 240,000 |
|
480,000 | 480,000 |
Total interest capitalized | 1,020,000 | 1,020,000 |
Less: Interest capitalized | (205,000) | (271,980) |
Interest expense | 815,000 | 748,020 |
Table (5)
Hence, the amount of interest expense that will appear in the income statement for the years 2016 and 2017 are $815,000 and $748,020 respectively.
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