On January 1, 2017, Tolvin Company signed a contract to have Bob's Builders construct a office building at a cost of $30,000,000. It was estimated that it would take four years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $20,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 8%. During 2017, Tolvin made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $6,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Tolvin realized investment income of $650,000. What amount should Tolvin report as capitalized interest at December 31, 2017?

Question

Quizplus · Accepted Answer

Capitalized interest is calculated based on the average accumulated expenditures related to the asset being constructed, not on the total loan amount. The average accumulated expenditures for the year were $6,000,000. The interest rate is 8%. Therefore, the capitalized interest is $6,000,000 * 8% = $480,000. Investment income does not affect the calculation of capitalized interest.

On January 1, 2017, Tolvin Company Signed a Contract to Have