Cranberry Corp.constructed equipment to manufacture a new line of home products during 2016.The average balance of accumulated expenditures on the equipment during September through December 2016 was $500,000.Construction started on September 1, 2016 and was still in progress at the end of 2016.If Cranberry borrowed $500,000 for one year on September 1, 2016, to finance the construction, and the interest rate on the construction loan was 6%, how much interest can Cranberry capitalize as part of the equipment cost for 2016?

Question

​Cranberry Corp.constructed equipment to manufacture a new line of home products during 2016.The average balance of accumulated expenditures on the equipment during September through December 2016 was $500,000.Construction started on September 1, 2016 and was still in progress at the end of 2016.If Cranberry borrowed $500,000 for one year on September 1, 2016, to finance the construction, and the interest rate on the construction loan was 6%, how much interest can Cranberry capitalize as part of the equipment cost for 2016?

Quizplus · Accepted Answer

Cranberry can capitalize interest for the period during which expenditures were being made, which is September through December 2016. The interest for one year would be $500,000 * 6% = $30,000. Since the construction lasted for 4 months within the year, the interest to be capitalized is $30,000 * (4/12) = $10,000.

​Cranberry Corp

Cranberry Corp