During 20X1, Clark Company manufactured equipment for its own use at a total cost of $2,400,000. The project required the entire year to complete and all costs were incurred uniformly throughout the year. At the beginning of the period, Clark was able to borrow $1,500,000 at 6% specifically for the purchase of materials and the manufacture of the equipment. The entire debt, with interest was repaid on December 31, 20X1, replaced with a long-term loan. Throughout 20X1, Clark Company had additional debt of $1,000,000 with a weighted average interest rate of 7%.
@californiaholic
See below. JRM did a great job but I personally struggle with this topic, so I wanted to expound the answer in more detail.
Step 1 = Figure out the weighted-average expenditures.
$2,400,000/2 = $1,200,000. You divide the $2.4M by 2 because “…all costs were incurred uniformly throughout the year”.
Step 2 = Calculate the weighted-average interest rate on the debt by multiplying each loan*interest rate. You can only capitalize interest up to the sum of the weighted-average expenditures.
If there was $1,500,0000 in weighted-average expenditures, then you can capitalize $1,500,000*0.06=$90,000. However, there is only $1,200,000 available.
$1,200,000*0.06= $72,000 capitalized amount
Step 3 = Amount expensed = total interest on loans – capitalized amount
$1,500,000*0.06=$90,000
$1,000,000*0.07=$70,000
$90,000+$70,000=$160,000-$72,000 = $88,000 interest expense
BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?
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