[yokomachi]

I can’t understand why this answer is C. Does anyone can explain ?

---

At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total

construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and

$300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%.

The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of

$800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize

as part of the cost of the plant addition?

a. $140,000

b. $132,000

c. $72,500

d. $60,000

[goodluck2everyone]

I would also like to know this

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

Use the usual rate of interest on other borrowings to compute the amount capitalized not the actual rate.

Loan = $500000 @ 12%

Draw #1 = $200000 @ 10% for 12 months = 20000 Actual interest

Draw #2 = $300000 @ 10% for 12 months = 30000 Actual interest

Draw #2 = $300000 @ 10% for 8 months = 20000 Imputed interest

Draw #3 = $300000 @ 10% for 1 month = 2500 Imputed interest

Total interest CAPITALIZED = $72,500

Make sense?

[goodluck2everyone]

still not understanding it entirely but thanks

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

That question is ridiculous….

[goodluck2everyone]

I figured it out.

I'm not sure whether your method is correct or not kricket because you still come up with the correct answer but I found out how GAAP wants us to do this.

Basically we have to find the weighted average expenditures for the year first:

200,000 x 12/12= 200,000

600,000 x 8/12= 400,000

300,000 x 1/12= 25,000

Adds up to 625,000. So this is our average expenditures for the year.

We then take the interest for our initial loan:

500,000 x 12%= 60,000

Then for the difference, we use the interest on other borrowings:

625,000- 500,000= 125,000

125,000 x 10%= 12,500

So for the year, it's 60,000 + 12,500= 72,500. This is how it should be done.

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

Per Statement of Financial Accounting Standards No. 34

“13. The amount capitalized in an accounting period shall be determined by applying an interest rate(s) (“the capitalization rate”) to the average amount of accumulated expenditures for the asset during the period. The capitalization rates used in an accounting period shall be based on the rates applicable to borrowings outstanding during the period. If an enterprise's financing plans associate a specific new borrowing with a qualifying asset, the enterprise may use the rate on that borrowing as the capitalization rate to be applied to that portion of the average accumulated expenditures for the asset that does not exceed the amount of that borrowing. If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with the asset, the capitalization rate to be applied to such excess shall be a weighted average of the rates applicable to other borrowings of the enterprise.”

In this problem the average accumulated expenditures ($625,000) for the asset exceeded the amount of the specific new borrowing associated with the asset ($500,000 @ 12%) so you have to use the weighted average of the rates applicable to other borrowings (10% since there was only one other borrowing). The way I figured the problem may seem simplistic but it is GAAP because I used 10% for the capitalization rate. I think the fact that we got the same answer is a coincidence, I worked the problem again, but changed a few facts, using my method and your method. If you change the second payment to $900,000 and the interest on the other borrowing to 8%. The answers are not the same.

My method:

200,000 X 12 / 12 = 200,000 X .08 = 16,000

300,000 X 12 / 12 = 300,000 X .08 = 24,000

600,000 X 8 / 12 = 400,000 X .08 = 32,000

300,000 X 1 / 12 = 25,000 X.08 = 25,000

Total Capitalized Interest = $74,000

Your method:

200,000 X 12 / 12 = 200,000

900,000 X 8 / 12 = 600,000

300,000 X 1 / 12 = 25,000

Average Expenditures = 825,000

500,000 X .12 = 60,000

325,000 X .08 = 26,000

Total Capitalized Interest = $86,000

If anyone knows of another FAS that supersedes FAS 34 please let me know.

[goodluck2everyone]

the answers wont be the same because what you did is wrong.

Even without going through the calculations, it's easy to see that you'd be wrong. Adding an additional $300,000 of expenditures and calculating that interest over 3/4 of the year at anything between 8-12% interest would make the answer jump up way more than just $1,500, which is what happened with your method.

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

I changed the facts of the question to see if you would get the same answer using either method. So the 900,000 is correct.

[goodluck2everyone]

^ I noticed that and edited my answer. Read above. Also, this is not MY method. This is the way its done in Wiley, in my review program, online websites, etc.

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

How about you do it your way on your exam and I'll do it mine? But lets be civil and not flat out call someone wrong when you aren't showing any calculations or citing any standards to support your argument.

[goodluck2everyone]

lol your way is flat out wrong and you're misinforming other users here, me included. I was staring at your method for 30 minutes trying to figure out what the heck was going on until I caved and found the correct method buried deep in the wiley book.

At the present moment, neither of us have credit for FAR and you recently failed it. There is no need to get defensive. Just cool off and you'll realize that the way I'm showing it is the correct way, especially after you reread FAS 34 which you quoted.

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[MinSeokYi]

Thanks @goodluck2everyone, I was trying to figure out this question for a while and your explanation makes perfect sense..

I also use wiley and the way @goodluck2everyone explains it, is pretty much exactly the way Wiley teaches us to do it.

(I kept putting in the wrong amounts for avg accm expends. and getting the wrong answer)..

BEC: Passed
REG: Passed
FAR: Almost Past (lol)
AUD: I thought I passed with flying colors, but I wasn't close!

[Anonymous]

I realize that I don't have credit for FAR and I that I recently failed. That was a low blow and frankly just mean. I have passed it before and will pass it again. I was trying to help, as I do when anyone posts a question that they don't understand. I guess I learned my lesson and I won't be doing that again, not if this is what you get when you try to help.

[goodluck2everyone]

lol people get so mad nowadays when somebody tells them they are wrong. Instead of being civil and acknowledging that the method you use is not correct, you behave like a teenager and use the whole “I'll do it my way, you do it your way” line.

This is not about MY way or YOUR way, its the CORRECT way and people come on the forums to get clarification on areas they are confused on. I never questioned your intelligence but I hate it when people get defensive for no reason.

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Sandra]

I'm new to this board and I can already see that no one here is more difficult to please and snarky than goodluck2everyone.

If you already had the answer why didn't you just go there?

[Author]

Replies