ExpertHard1 markMultiple Choice
CPA · Question 19 · Area II: Balance Sheet Accounts
Construction Co. is building a warehouse for its own use. <br/>- Expenditures: Jan 1: $200,000; July 1: $400,000; Nov 1: $300,000.<br/>- Specific construction debt: $300,000 at 10%.<br/>- General debt: $1,000,000 at 5%.<br/><br/>What is the amount of interest to be capitalized for the year ended December 31?
Construction Co. is building a warehouse for its own use. <br/>- Expenditures: Jan 1: $200,000; July 1: $400,000; Nov 1: $300,000.<br/>- Specific construction debt: $300,000 at 10%.<br/>- General debt: $1,000,000 at 5%.<br/><br/>What is the amount of interest to be capitalized for the year ended December 31?
Answer options:
A.
$30,000
B.
$45,000
C.
$37,500
D.
$80,000
How to approach this question
1. Calculate Weighted Average Accumulated Expenditures (WAAE). 2. Apply specific interest rate to WAAE up to specific debt amount. 3. Apply weighted average rate of general debt to excess WAAE. 4. Compare Avoidable Interest to Actual Interest (Capitalize lower).
Full Answer
C.$37,500✓ Correct
1. **WAAE Calculation:**<br/> Jan 1: $200,000 * 12/12 = $200,000<br/> July 1: $400,000 * 6/12 = $200,000<br/> Nov 1: $300,000 * 2/12 = $50,000<br/> Total WAAE = $450,000.<br/><br/>2. **Interest Calculation:**<br/> Specific Debt ($300,000 @ 10%) covers first $300,000 of WAAE. Interest = $30,000.<br/> Remaining WAAE ($450,000 - $300,000 = $150,000) uses General Debt rate (5%). Interest = $150,000 * 5% = $7,500.<br/> Total Avoidable Interest = $30,000 + $7,500 = $37,500.<br/><br/>3. **Check Limit:**<br/> Actual Interest = ($300k * 10%) + ($1M * 5%) = $30k + $50k = $80,000.<br/> Avoidable ($37.5k) < Actual ($80k).<br/> Capitalize $37,500.
Common mistakes
Using simple average of expenditures; applying general rate to total WAAE; failing to check actual interest limit.
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