[Silent]

I am confused with this question and not seeing much of explanation to the answer . Where are they getting 125,000 to multiply 10% from?

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?

First calculate the Average Accumulated Expenditures (AAE). This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). Next calculate avoidable interest ($72,500) and actual interest (($500,000 × 12%) + ($800,000 × 10%) = $140,000). The amount that can be capitalized is the lesser of the avoidable interest or actual interest. The amount that can be capitalized is $72,500.

AAE
200,000 12/12 200,000
600,000 8/12 400,000
300,000 1/12 25,000
625,000

Avoidable interest
500,000 12% 60,000
125,000 10% 12,500
72,500

[AndreA]

Your AAE 625,000, you need to go back to the chapter and read it again, in this example they're using Specific method.
625,000 – 500,000 = 125,000

[Silent]

Andrea Thank you very much. I keep forgetting to subtract 500k from 625 🙁

[AndreA]

No problem. Good luck with your study!

[Author]

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