[misoc23]

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 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, 10-year, 7% note payable dated January 1, Year 1. How much interest should be capitalized by Starlight during Year 3?

The solution is 12,500. I do not understand why 250,000 is divided by 2????

125 x 10% = 12.5

Compared to 200 x 10% + 150 x 7%

20+10.5 = 30.5 total actual interest

30.5>12.5

Capitalize the lower amount 12.5