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
This has me all confuzzed. So you take the weighted average of the expenditures and get a number. For this example it is $625,000. Then you multiply the first $500,000 because that is related to the construction cost and multiply it by 12%. The rest $125,000 is multiplied by the 10%. Added together this equals $72,500.
Don't you take the lesser of actual interest and avoidable interest? Where does that come in to play?
AUD: 84
REG: 84
BEC: 79
FAR: 83
.