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On January 2, 2010, Indian River Groves began construction of a new citrus processing plant.The automated plant was finished and ready for use on September 30, 2011.Expenditures for the construction were as follows:
Indian River Groves borrowed $1,100,000 on a construction loan at 12% interest on January 2, 2010.This loan was outstanding during the construction period.The company also had $4,000,000 in 9% bonds outstanding in 2010 and 2011.
-The interest capitalized for 2011 was:

Question

Use the following information for questions.
On January 2, 2010, Indian River Groves began construction of a new citrus processing plant.The automated plant was finished and ready for use on September 30, 2011.Expenditures for the construction were as follows:  
Indian River Groves borrowed $1,100,000 on a construction loan at 12% interest on January 2, 2010.This loan was outstanding during the construction period.The company also had $4,000,000 in 9% bonds outstanding in 2010 and 2011.
-The interest capitalized for 2011 was:

Quizplus · Accepted Answer

To calculate the interest capitalized, we need to find the weighted average accumulated expenditures (WAAE) for the year. 
WAAE = (Expenditures for the year x time weighted) 
Expenditures for the year = $5,000,000 
Time weighted = (3/12) = 0.25 (September 30th being the midpoint of the year)

WAAE = $5,000,000 x 0.25 = $1,250,000

Next, we need to calculate the total interest expense for the year on the construction loan and the bonds. 
Construction loan interest = $1,100,000 x 12% x (9/12) = $99,000 
Bond interest = $4,000,000 x 9% = $360,000

Therefore, the total interest expense is $459,000.

Finally, we can calculate the interest capitalized for the year: 
Interest capitalized = WAAE x Weighted Average Interest Rate 
Weighted average interest rate = total interest expense / (construction loan + bonds outstanding) 
Weighted average interest rate = $459,000 / ($1,100,000 + $4,000,000) = 9%

Interest capitalized = $1,250,000 x 9% = $118,305

Therefore, the correct answer is B.

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