Mozely Company borrowed $400,000 on a 10 percent note payable to finance a new warehouse Mozely is constructing for its own use. The only other debt on Mozely's books is a $600,000, 12 percent mortgage payable on an office building. At the end of the current year, average accumulated expenditures on the new warehouse totaled $475,000. Mozely should capitalize interest for the current year in the amount of

Question

Quizplus · Accepted Answer

The interest to be capitalized is based on the average accumulated expenditures ($475,000) and the interest rates of the borrowings. The specific borrowing rate is 10% on $400,000, and the weighted average interest rate on the remaining debt is 12% on $600,000. Since the average accumulated expenditures ($475,000) exceed the specific borrowing ($400,000), the excess ($75,000) is multiplied by the weighted average interest rate. Calculating: ($400,000 * 10%) + ($75,000 * 12%) = $40,000 + $9,000 = $49,000.

Mozely Company Borrowed $400,000 on a 10 Percent Note Payable