On January 1, 2016, Randolf Company signed a contract to have Rory Associates construct a manufacturing facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2016, to finance the construction cost, Randolf borrowed $14,000,000 payable in seven annual installments of
$2,000,000 plus interest at the rate of 9%. During 2016, Randolf made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Randolf realized investment income of $330,000. What amount should Randolf report as capitalized interest at December 31, 2016?

Question

Quizplus · Accepted Answer

Capitalized interest is calculated based on the average accumulated expenditures on the asset being constructed, not on the total loan amount. The interest rate is 9%, and the average accumulated expenditures were $3,000,000. Therefore, the capitalized interest is 9% of $3,000,000, which equals $270,000. Investment income from the excess funds does not affect the calculation of capitalized interest.

On January 1, 2016, Randolf Company Signed a Contract to Have