Sonora Company borrowed $400,000 on a 10 percent note payable to finance a new warehouse Sonora is constructing for its own use.The only other debt on Sonora's books is a $600,000,12 percent mortgage payable on an office building.At the end of the current year,average accumulated expenditures on the new warehouse totaled $475,000.Sonora should capitalize interest for the current year in the amount of

Question

Quizplus · Accepted Answer

The interest to be capitalized is based on the average accumulated expenditures ($475,000) and the interest rates of the borrowings. The specific borrowing rate is 10% on $400,000, and the weighted average interest rate on the remaining debt is 12% on $600,000. Since the average accumulated expenditures exceed the specific borrowing, the excess ($75,000) is multiplied by the weighted average interest rate. The calculation is: ($400,000 * 10%) + ($75,000 * 12%) = $40,000 + $9,000 = $49,000.

Sonora Company Borrowed $400,000 on a 10 Percent Note Payable