Solara Company entered into a contract with Hammer Construction Company to construct a building.Construction began in 2014 and was completed in 2015.As of January 1,2015,Solara had made total progress payments to Hammer of $50,000.In addition,interest capitalized on the building during 2014 was $2,500.Solara made additional payments on June 30,2015,and December 31,2015.Solara had issued $80,000 of 9% bonds to finance part of the construction.The average interest on Solara's additional debt was 11% for 2015. How much interest should be capitalized by Solara for 2015?
A) $6,750
B) $6,975
C) $13,500
D) $13,725

Question

Quizplus · Accepted Answer

Interest to be capitalized for 2015 is calculated based on the weighted average accumulated expenditures for the construction project. The interest rate used is the lower of the actual interest rate on the specific debt incurred to finance the project or the weighted average of interest rates on all outstanding debt if the project was not specifically financed by a particular debt issuance. In this case, the calculation involves the interest on the $80,000 of 9% bonds and the additional debt at an average interest rate of 11%. However, without the specific amounts of additional payments and the timing of expenditures, a precise calculation cannot be provided here. The correct answer, based on the information given, would typically involve calculating the interest based on the weighted average accumulated expenditures and applying the appropriate interest rates. Since the exact calculation steps and the necessary additional payment amounts are not provided, the correct choice is selected based on the assumption that the question expects familiarity with the concept of interest capitalization rather than the execution of a specific calculation.

Solara Company Entered into a Contract with Hammer Construction Company