During 2014, Bass Corporation constructed assets costing $3,000,000. The weighted-average accumulated expenditures on these assets during 2014 was $1,800,000. To help pay for construction, $1,320,000 was borrowed at 10% on January 1, 2014, and funds not needed for construction were temporarily invested in short-term securities, yielding $27,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $1,500,000, 10-year, 9% note payable dated January 1, 2008. What is the amount of interest that should be capitalized by Bass during 2014?

Question

Quizplus · Accepted Answer

The amount of interest that should be capitalized is the lower of the actual interest cost ($132,000) or the avoidable interest ($175,200). 
The avoidable interest is calculated as the weighted-average accumulated expenditures ($1,800,000) multiplied by the interest rate on borrowings ($1,320,000 at 10% = $132,000) and the weighted-average period of time during which the expenditures were made (6 months). 
$1,800,000 x 10% x 6/12 = $90,000 
However, the interest revenue earned on temporary investments can be used to offset the avoidable interest. 
$175,200 - $27,000 = $148,200 
Therefore, the amount of interest to be capitalized is $90,000, which is less than the actual interest cost of $132,000.

During 2014, Bass Corporation Constructed Assets Costing $3,000,000