On January 1, an Enterprise Fund issues $1,000,000 of 6%, ten-year tax-exempt bonds to finance the construction of a new water treatment plant. During the year, the Enterprise Fund earned $40,000 of interest income on the bond proceeds and incurred $600,000 of construction costs. What amount of interest cost should be capitalized for the year?

Question

Quizplus · Accepted Answer

The interest cost to be capitalized is calculated as follows: 
Total Interest = $1,000,000 x 6% = $60,000 
Interest during construction period = $60,000 x (600,000/1,000,000) = $36,000 
Interest to be capitalized = Interest during construction period - Interest income earned = $36,000 - $40,000 = -$4,000 
Since the interest income earned is greater than the interest during the construction period, there is no interest cost to be capitalized. Therefore, the answer is B, $20,000.

On January 1, an Enterprise Fund Issues $1,000,000 of 6