Question

Thornton Industries began construction of a warehouse on July 1, 2021. The project was completed on March 31, 2022. No new loans were required to fund construction. Thornton does have the following two interest-bearing liabilities that were outstanding throughout the construction period:$2,000,000, 8% note$8,000,000, 4% noteConstruction expenditures incurred were as follows:a.July 1, 2021 $400,000b.Sep 30, 2021 600,000c.Nov 30, 2021 600,000d.Jan 30, 2021 540,000The company's fiscal year-end is December 31.Required:Calculate the amount of interest capitalized for 2022..

Answer 1

Answer:

$4,320

Explanation:

The computation of the amount of interest capitalized for 2022 is shown below:-

The average interest rate based on the two interest-bearing liabilities

Total interest                   Total interest on

bearing liabilities        each outstanding liability

$2,000,000               $2,000,000 × 8% = $160,000

$8,000,000             $8,000,000 × 4% = $320,000

$10,000,000                                             $480,000

Average interest rate = $480,000 ÷ $10,000,000

= 0.048

or 4.8%

Average accumulated expenses in year 2022 = $540,000 × 2 ÷ 3

= $360,000

The amount of interest to be capitalized in year 2022

= $360,000 × 4.8% × 3 ÷ 12

= $4,320

The amount of interest to be capitalized in year 2022 = $4,320