[UH_CPA]

Calling on all FAR experts!! I am struggling with a question in the Becker software, related to the interest capitalization topic. Please Help!!

CPA2013-05105

On January 1, Year 3, Starlight Construction Co. Began a construction project qualifying for capitalization of interest. The total amount spent on this project during year 3 was $250,000, spent uniformly during the year. To help pay for construction, $200,000 was borrowed at 10% on January 1, Year 3, and funds were not needed for construction were temporarily invested in short term securities, yielding $3,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $150,000, 10year, 7% note payable dated January 1, Year 1. How much interest should be capitalized by Starlight during Year 3?

A. 25,000

B. 22,000

C. 12,500

D. 9,500

Why does the solution require us to divide the total expenditures by 2? The explanation states that “average accumulated expenditures” must be divided by 2 to arrive at “average accumulated expenditures”, since expenditures were incurred evenly during the year.

Does this makes sense to anybody? I do not see the logic in this, maybe it is time to go to bed.

Thanks!!!

[serena2014]

I'm gonna cry, I'm so glad someone brought up the question I have difficulty to understand…. but no one answered…

why divided by 2, I have no idea, the question didn't say semi annual… I cann't go to bed without an answer. Can anyone help?

FAR-75
REG-79
BEC-82
AUD-82

“When nothing seems to help, I go look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before.”

[serena2014]

Hi, I found something may helpful…since no one is helping us.

Average accumulated expenditures for a period is an approximation of the average amount of debt the company would have had outstanding if it borrowed all of the funds necessary for construction. If construction expenditures are incurred equally throughout the period, the average accumulated expenditures for the period can be estimated by adding the accumulated expenditures at the beginning of the period to the accumulated expenditures at the end of the period and dividing by two. If expenditures on the project are unequal throughout the period, individual expenditures, perhaps expenditures grouped

by month, should be weighted by the amount of time outstanding until the end of the construction period or the end of the company’s fiscal year, whichever comes first.

FAR-75
REG-79
BEC-82
AUD-82

“When nothing seems to help, I go look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before.”

[Anonymous]

https://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter10/chbody1/self-constructed_assets.htm

read “AVERAGE ACCUMULATED EXPENDITURES.”

because the amount of borrowing is spent OVER A PERIOD of time (in your case over the period of year 3 instead of ALL at once in Jan 1, Year 3), interest is capitalization is determined by averaging (0 + 250000)/2 = 125000*.1 = 12500.

this concept is very similar to weighted-average calculation for EPS in the outstanding shares area.

since the first 200,000 borrowed covers the 125,000 of average expenditures, you only use the 10% interest rate. when the average accumulated expend. exceeds 200,000 you use the next level of interest rates, which is 7% in this case.

[Author]

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