During 2007, Aber Corporation constructed assets costing $1,000,000.The weighted-average accumulated expenditures on these assets during 2007 was $600,000.To help pay for construction, $440,000 was borrowed at 10% on January 1, 2007, and funds not needed for construction were temporarily invested in short-term securities, yielding $9,000 in interest revenue.Other than the construction funds borrowed, the only other debt outstanding during the year was a $500,000, 10-year, 9% note payable dated January 1, 2001.What is the amount of interest that should be capitalized by Aber during 2007?

Question

Quizplus · Accepted Answer

The amount of interest that should be capitalized is calculated as the weighted-average accumulated expenditures multiplied by the interest rate of the specific borrowing. 
Therefore:
$600,000 x 10% = $60,000 
This $60,000 is the interest that should be capitalized for the construction funds borrowed. 
However, during the year, Aber had excess funds that were temporarily invested, yielding $9,000 in interest revenue. 
Since the excess funds were not needed for construction, the interest revenue should be used to offset the interest expense that needs to be capitalized. 
Therefore: 
$60,000 - $9,000 = $51,000 
This means that Aber should capitalize $51,000 of interest expense during 2007. 
Additionally, the long-term note payable outstanding does not need to have interest expense capitalized since it was not borrowed specifically for the construction project.

During 2007, Aber Corporation Constructed Assets Costing $1,000,000