During 2015, a company built a new facility at a cost of $30,000,000. Expenses have been incurred
The building, which was completed in late 2015, increased evenly throughout the year. The outstanding loans were at 31
December 2015.
10% loan to finance construction specifically, dated January 1, 2015, 10,000,000. then
We made investments on the proceeds of this loan and achieved income of 100,000 in 2015.
12% 20-year bonds issued at nominal value on April 30, 2014, 3000000000.
8% 5-year loan, dated March 1, 10,000,000,2014. 2014
How much interest is capitalized in the cost of the new building

To calculate the interest to be capitalized in the cost of the new building, we'll follow these steps:

### 1. **Identify the Relevant Borrowings and Interest Rates**
- **Loan 1:** A 10% loan of $10,000,000 taken on January 1, 2015, specifically for the construction.
- **Loan 2:** 12% bonds, $3,000,000 issued on April 30, 2014.
- **Loan 3:** 8% loan, $10,000,000 taken on March 1, 2014.

### 2. **Calculate the Specific Borrowing Cost**
For the specific loan of $10,000,000 at 10%, we calculate the interest for the full year and subtract the income earned from investments:

- **Interest on Loan 1:**
  \[
  10,000,000 \times 10\% = 1,000,000
  \]
- **Income from investment:**
  \[
  \text{Investment income} = 100,000
  \]
- **Net interest to capitalize from specific loan:**
  \[
  \text{Net Interest on Loan 1} = 1,000,000 - 100,000 = 900,000
  \]

### 3. **Calculate the Weighted Average Interest Rate for General Borrowings**
For the remaining general borrowings (bonds and the other loan):

- **Interest on Bonds (Loan 2):**
  \[
  3,000,000 \times 12\% = 360,000
  \]
- **Interest on Loan 3:**
  \[
  10,000,000 \times 8\% = 800,000
  \]

- **Total general borrowings:**
  \[
  3,000,000 + 10,000,000 = 13,000,000
  \]
- **Total interest on general borrowings:**
  \[
  360,000 + 800,000 = 1,160,000
  \]

- **Weighted average interest rate:**
  \[
  \frac{1,160,000}{13,000,000} = 0.08923 \text{ or } 8.923\%
  \]

### 4. **Apply Weighted Average Interest Rate to Construction Cost**
The building construction cost was $30,000,000, but we subtract the amount covered by the specific loan:

- **Amount financed by general borrowings:**
  \[
  30,000,000 - 10,000,000 = 20,000,000
  \]

- **Interest to capitalize from general borrowings:**
  \[
  20,000,000 \times 8.923\% \times 1 = 1,784,600
  \]

### 5. **Total Capitalized Interest**
Add the net interest from the specific loan and the interest calculated from the general borrowings:

- **Total capitalized interest:**
  \[
  900,000 + 1,784,600 = 2,684,600
  \]

### Conclusion:
The total interest that should be capitalized in the cost of the new building is **$2,684,600**.

Would you like more details, or do you have any questions?

### Related Questions:
1. How does capitalizing interest impact the financial statements compared to expensing it?
2. What would be the effect of delaying the completion of the building on the capitalized interest?
3. How does investment income affect the amount of interest to be capitalized?
4. What are the accounting standards governing the capitalization of borrowing costs?
5. How would the capitalization change if the construction cost was different?

### Tip:
When calculating capitalized interest, always adjust for any income generated from the loan proceeds, as this reduces the amount of interest that can be capitalized.

Learn how to calculate capitalized interest on building construction costs using specific loans and general borrowings. Includes formulas for interest calculation and weighted average interest rate. Suitable for advanced finance professionals.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation