During 2015, a company created assets costing 4,215,000. The weighted average expenditure during Year 2015 900,000, 3. The company borrowed 2,000,000 at a rate of 7.5 on January 1, 2015. has been invested Money not required to build temporarily in short-term securities and got 59,000 of Interest income. In addition to the construction loan, the company had two other loans outstanding during the year, 500,00, 101 years at 10% interest on October 1, 2013, and 1,000,000, 8%, 5 years. On November 2, 2014. How much interest must be capitalized during 2015?

To determine the amount of interest that must be capitalized during 2015, we need to follow these steps:

### 1. Calculate the Actual Interest Incurred
First, calculate the actual interest incurred on all loans during the year.

#### a. Interest on the Construction Loan:
- Amount borrowed: $2,000,000
- Interest rate: 7.5%

\[
\text{Interest on Construction Loan} = 2,000,000 \times \frac{7.5}{100} = 150,000
\]

#### b. Interest on the Other Loans:
- **Loan 1**: $500,000 at 10%
    - Interest: $500,000 × 10% = $50,000
- **Loan 2**: $1,000,000 at 8%
    - Interest: $1,000,000 × 8% = $80,000

\[
\text{Total Interest on Other Loans} = 50,000 + 80,000 = 130,000
\]

### 2. Calculate the Avoidable Interest
The avoidable interest is calculated by applying the weighted-average interest rate of the other loans to the weighted-average expenditure on the project.

#### a. Weighted-Average Interest Rate on Other Loans:
- Loan 1: $500,000 at 10%
- Loan 2: $1,000,000 at 8%

\[
\text{Weighted-Average Interest Rate} = \frac{(500,000 \times 10\%) + (1,000,000 \times 8\%)}{500,000 + 1,000,000}
\]

\[
\text{Weighted-Average Interest Rate} = \frac{50,000 + 80,000}{1,500,000} = \frac{130,000}{1,500,000} = 8.67\%
\]

#### b. Avoidable Interest:
Apply this rate to the weighted-average expenditure on the project.

\[
\text{Avoidable Interest} = 900,000 \times 8.67\% = 78,030
\]

### 3. Determine the Interest to be Capitalized
The lower of the actual interest incurred and the avoidable interest should be capitalized. In this case:

- Actual interest incurred (on construction loan) = $150,000
- Avoidable interest = $78,030

Since $78,030 (avoidable interest) is less than the actual interest incurred, **$78,030** should be capitalized.

### 4. Consideration of the Interest Income
The interest income from short-term securities is $59,000. If the company subtracts this from the interest to be capitalized:

\[
\text{Net Interest Capitalized} = 78,030 - 59,000 = 19,030
\]

### Final Answer:
The interest to be capitalized during 2015 is **$19,030**.

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Do you want details or have any questions?

Here are 5 related questions that might interest you:
1. How does capitalizing interest impact financial statements?
2. What are the conditions for capitalizing interest under accounting standards?
3. How is the weighted-average interest rate used in capitalizing interest?
4. What happens if avoidable interest exceeds actual interest incurred?
5. How does short-term investment income affect interest capitalization?

**Tip:** Always cross-check the components of your weighted-average calculations to ensure all relevant loans are included.

Learn how to calculate interest capitalization for construction projects using the weighted average expenditure and avoidable interest methods. This detailed guide covers a scenario involving multiple loans and interest rates. Explore the calculation steps and examples. Suitable for professionals in accounting and finance.

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