During 2007, Gannon Co.incurred average accumulated expenditures of $400,000 during construction of assets that qualified for capitalization of interest.The only debt outstanding during 2007 was a $500,000, 10%, 5-year note payable dated January 1, 2005.What is the amount of interest that should be capitalized by Gannon during 2007?

Question

Quizplus · Accepted Answer

In order to determine the amount of interest that should be capitalized, we need to calculate the weighted average accumulated expenditures for the year.

Weighted Average Accumulated Expenditures = (Amount of Expenditures * Time) / Total Time

For Gannon, the calculation would be:

Weighted Average Accumulated Expenditures = ($400,000 * 12 months) / 12 months = $400,000

Next, we need to calculate the amount of interest expense that could have been avoided if the expenditures had not been made. This is calculated by multiplying the weighted average accumulated expenditures by the interest rate:

Avoidable Interest = Weighted Average Accumulated Expenditures * Interest Rate

Avoidable Interest = $400,000 * 10% = $40,000

Since Gannon only incurred $40,000 of interest expense during the year, all of it is eligible for capitalization. Therefore, the amount of interest that should be capitalized by Gannon during 2007 is $40,000.