INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
Question
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Chapter 10, Problem 10.9P

1.

To determine

Interest Capitalization:

Interest capitalization refers to the interest amount that is added to the cost of the long-term asset. Such interest capitalization amount includes the interest amount of the debt which was financed for acquiring the asset.

To Calculate: The amount of interest that Company M should capitalize in 2016 and 2017 using the specific interest method.

1.

Expert Solution
Check Mark

Explanation of Solution

Calculate the amount of interest capitalized in the year 2016.

Month Construction Expenditure ($)   Interest Outstanding (Number of months)   Accumulated Expenditure ($)
January 1, 2016 100,000 × 1212 = 1,000,000
March 1, 2016    600,000 × 1012 = 500,000
June 30, 2016    800,000 × 612 = 400,000
October 1, 2016 600,000   312 = 150,000
Accumulated expenditures (before interest) $3,000,000        
      Average accumulated expenditures $2,050,000

Table (1)

Determine the capitalized interest.

Capitalizedinterest = (Accumulated expenditure× Interest rate )=$2,050,000×10100= $205,000

Calculate the amount of interest capitalized in the year 2017.

Month Construction Expenditure   Interest Outstanding   Accumulated Expenditure
January 1, 2017 3,205,000 × 99 = 3,205,000
January 31, 2017 270,000 × 89 = 240,000
April 30, 2017 585,000 × 59 = 325,000
August 31, 2017 900,000 × 19 = 100,000
Accumulated expenditures (before interest) 4,960,000        
      Average accumulated expenditure 3,870,000

Table (2)

Determine the weighted average rate of all other debt.

  Amount ($)   Interest rate   Interest Amount ($)
Long-term note 6% $4,000,000 × 6% = 240,000
Long-term note 8% $6,000,000 × 8% = 480,000
Total $10,000,000       720,000

Table (3)

Working Note:

Determine the weighted-average interest rate.

Weighted average =Interest amountAmount×100  =$720,000$10,000,000×100=7.2%

Determine the amount of difference.

Amount of difference = (Average accumulated expenditure– Construction loan )= $3,870,000 – $3,000,000=$870,000

Determine the interest on amount of difference.

Interest on amount of difference = $870,000 × 7.2%×912=$46,980

Determine the interest on amount on the construction loan.

Interest on amount on the construction loan = $3,000,000 × 10100×912=$225,000

Determine the capitalized interest.

Capitalizedinterest = (Interest on connstruction loan+ Interest on amount)=$225,000+$46,980= $271,980

Conclusion

Hence, the amount of interest capitalized in the year 2016, and 2017 are $205,000, and $271,980 respectively.

2.

To determine

The total cost of the building.

2.

Expert Solution
Check Mark

Explanation of Solution

Determine the total cost of the building.

Particulars Amount ($)

Accumulated expenditures as on September 30, 2017

before interest capitalization

4,960,000
Add: Interest capitalization as on 2017 271,980
Total cost of building 5,231,980

Table (4)

Conclusion

Hence, the total cost of the building is $5,231,980.

3.

To determine

To Calculate: The amount of interest expense that will appear in the 2016 and 2017 income statements.

3.

Expert Solution
Check Mark

Explanation of Solution

Calculate the amount of interest expense for 2016 and 2017.

  2016 2017
  Amount ($) Amount ($)
$3,000,000×10% 300,000 300,000
$4,000,000×6% 240,000 240,000
$6,000,000×8% 480,000 480,000
Total interest capitalized 1,020,000 1,020,000
Less: Interest capitalized (205,000) (271,980)
Interest expense 815,000 748,020

Table (5)

Conclusion

Hence, the amount of interest expense that will appear in the income statement for the years 2016 and 2017 are $815,000 and $748,020 respectively.

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Chapter 10 Solutions

INTERMEDIATE ACCOUNTING

Ch. 10 - Prob. 10.11QCh. 10 - Identify the two exceptions to valuing property,...Ch. 10 - In what situations is interest capitalized?Ch. 10 - Define average accumulated expenditures and...Ch. 10 - Explain the difference between the specific...Ch. 10 - Prob. 10.16QCh. 10 - Prob. 10.17QCh. 10 - Explain the accounting treatment of costs incurred...Ch. 10 - Explain the difference in the accounting treatment...Ch. 10 - Prob. 10.20QCh. 10 - Prob. 10.21QCh. 10 - Prob. 10.22QCh. 10 - Prob. 10.23QCh. 10 - Acquisition cost; machine LO101 Beavert on Lumber...Ch. 10 - Prob. 10.2BECh. 10 - Prob. 10.3BECh. 10 - Cost of a natural resource; asset retirement...Ch. 10 - Asset retirement obligation LO101 Refer to the...Ch. 10 - Prob. 10.6BECh. 10 - Prob. 10.7BECh. 10 - Prob. 10.8BECh. 10 - Prob. 10.9BECh. 10 - Prob. 10.10BECh. 10 - Prob. 10.11BECh. 10 - Nonmonetary exchange LO106 Refer to the situation...Ch. 10 - Nonmonetary exchange LO106 Refer to the situation...Ch. 10 - Prob. 10.14BECh. 10 - Prob. 10.15BECh. 10 - Research and development LO108 Maxtor Technology...Ch. 10 - Prob. 10.1ECh. 10 - Acquisition cost; equipment LO101 Oaktree Company...Ch. 10 - Prob. 10.3ECh. 10 - Prob. 10.4ECh. 10 - Prob. 10.5ECh. 10 - Prob. 10.6ECh. 10 - Prob. 10.7ECh. 10 - Prob. 10.8ECh. 10 - Prob. 10.9ECh. 10 - Acquisition costs; noninterest-bearing note ...Ch. 10 - Prob. 10.11ECh. 10 - Prob. 10.12ECh. 10 - Prob. 10.13ECh. 10 - Prob. 10.14ECh. 10 - Prob. 10.15ECh. 10 - Prob. 10.16ECh. 10 - Nonmonetary exchange LO106 [This is a variation...Ch. 10 - Prob. 10.18ECh. 10 - Nonmonetary exchange LO106 [This is a variation...Ch. 10 - Prob. 10.20ECh. 10 - Prob. 10.21ECh. 10 - Prob. 10.22ECh. 10 - FASB codification research LO101, LO106, LO107,...Ch. 10 - Prob. 10.24ECh. 10 - Prob. 10.25ECh. 10 - Prob. 10.26ECh. 10 - Prob. 10.27ECh. 10 - Prob. 10.28ECh. 10 - Prob. 10.29ECh. 10 - Prob. 10.30ECh. 10 - Prob. 10.31ECh. 10 - Prob. 10.32ECh. 10 - Prob. 10.33ECh. 10 - Prob. 10.34ECh. 10 - Prob. 10.35ECh. 10 - Prob. 1CPACh. 10 - Prob. 2CPACh. 10 - Prob. 3CPACh. 10 - Prob. 4CPACh. 10 - Prob. 5CPACh. 10 - Prob. 6CPACh. 10 - Prob. 7CPACh. 10 - Prob. 8CPACh. 10 - Prob. 9CPACh. 10 - Prob. 10CPACh. 10 - Prob. 1CMACh. 10 - Prob. 2CMACh. 10 - Prob. 3CMACh. 10 - Prob. 10.1PCh. 10 - Prob. 10.2PCh. 10 - Prob. 10.3PCh. 10 - Prob. 10.4PCh. 10 - Acquisition costs; journal entries LO101, LO103,...Ch. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - Judgment Case 101 Acquisition costs LO101, LO103,...Ch. 10 - Prob. 10.2BYPCh. 10 - Judgment Case 10–3 Self-constructed...Ch. 10 - Judgment Case 104 Interest capitalization LO107...Ch. 10 - Prob. 10.6BYPCh. 10 - Prob. 10.7BYPCh. 10 - Judgment Case 108 Research and development LO108...Ch. 10 - Prob. 10.9BYPCh. 10 - Prob. 10.11BYPCh. 10 - Prob. 10.12BYPCh. 10 - Prob. 10.13BYPCh. 10 - Prob. 10.14BYPCh. 10 - Prob. 10.15BYPCh. 10 - Prob. 10.16BYPCh. 10 - Prob. 10.17BYP
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