Capitalization of Interest cost still trips me up even if I’ve improvised the tools for me to remember when to capitalize and when to expense. The terms weighted average accumulated expenditures and avoidable interest, what are those? If someone can explain them to me in English, I will really appreciate it.
To be specific, here is Question#CPA-05105:
On 1/1/Y3, ABC began a construction project qualifying for capitalization of interest. The total amount spent on this project during Y3 was $250,000, spent uniformly during the year. To help pay for construction, $200,000 was borrowed at 10% on 1/1/Y3, and funds not needed for construction were temporarily invested in short-term securities, yielding $3,000 interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was $150,000, 7% NP dated 1/1/Y1. How much interest should be capitalized by ABC during Y3?
Correct Answer: $12,500
Explanation/Calculations:
Total expenditures $250,000 ÷ 2 = $125,000 Average Accum. Expenditures
$125,000 x .10 = $12,500 Avoidable Interest
Compare avoidable interest to actual total interest cost incurred and capitalize the lower amount.
Actual Interest $200,000 x .10 = $20,000
>>>>>>>>>>>> $150,000 x .07 = 10,500
Total Actual Interest Cost >>> = $30,500 > $12,500 Avoidable Interest
Capitalize the lower amount. Interest earned on money invested is interest revenue. It does not affect the amount of interest expensed or capitalized.
Becker touches this topic at F4 explaining it with 2 pages back to back. Unfortunately, I am unable to grasp the explanations above.
Why are expenditures split in half? And why compare?
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