[Chantel]

Working on reading the FAR Ninja book and just can’t understand this question. I just can’t understand why you’re calculating interest on the expenditures even though it wasn’t money borrowed. Is it because if these expenditures weren’t made the debt could of been paid off?

Co. started construction on a new 2 million addition to its plant at beg of the year. Total expenditures for the year are 200 on Jan 2, 600k on May 1, 300k on Dec 1. They borrowed 500k for the construction on Jan 2 at 12%. Other debt outstanding us long-term mortgage of 800k at 10%. What interest should be capitalized as part of the plant addition?

Answer is $72,500

(200k x 12/12 months) + ( 600k x 8/12 months) + (300k x 1/12) = 625k

500k x 12% = 60k in interest

625k – 500k = 125k

125k x 10% = 12,500 in interest

60000 + 12500 = 72,500

F - F ('12), 90 (Dec '15)
A - F ('12), 73 (Feb '16), ? (July '16)
R - 87 (May '16)
B -

[musicamor]

Yes, the theory behind capitalized interest is “avoidance. If I didn't have CAPEX, then I would pay off debt. Theoretically, it is avoidable – and therefore, capitalizable as part of the cost to get the asset in a state for intended use. To calc the interest, you need to first calc Average Accumulated Expenditures (essentially a time-weighting based on how long the project is “in-progress,” and multiply that number by your weighted average interest rate.

Texas CPA - licensed in 2012!!!

[Author]

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