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Arlington Company is constructing a building.Construction began on January 1 and was completed on December 31.Expenditures were $2,400,000 on March 1, $1,980,000 on June 1, and $3,000,000 on December 31.Arlington Company borrowed $1,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building.In addition, the company had outstanding all year a 10%, 3-year, $2,400,000 note payable and an 11%, 4-year, $4,500,000 note payable.
-During 2011, Chan Company incurred average accumulated expenditures of HK$3,200,000 during construction of assets that qualified for capitalization of interest.The only debt outstanding during 2011 was a HK$5,000,000, 7.5%, 6-year note payable dated July 1, 2010.What is the amount of interest that should be capitalized by Chan during 2011?

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Quizplus · Accepted Answer

To determine the amount of interest that should be capitalized, we need to calculate the weighted average of accumulated expenditures during construction:
((HK$3,200,000 x 6/12) / HK$5,000,000) x 7.5% = HK$120,000 for the first six months of the year
((HK$3,200,000 x 6/12) / HK$5,000,000) x 7.5% = HK$120,000 for the second six months of the year
Therefore, the amount of interest that should be capitalized during 2011 is HK$240,000 (option C).

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