On May 1, 2020, Ethiopia Ltd. began construction of a new building for its own use. Expenditures of $ 75,000 were incurred monthly for five months beginning on May 1. The building was completed and ready for occupancy on September 1, 2020. For the purpose of determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures on the building during 2020 were

Question

Quizplus · Accepted Answer

The weighted-average accumulated expenditures are calculated by considering the amount of time each expenditure amount was outstanding during the construction period. Since $75,000 was spent each month for five months, the total expenditure is $375,000. However, to find the weighted-average, we need to consider the timing. The first month's expenditure (May) was outstanding for the entire construction period (5 months), the second month's expenditure (June) for 4 months, and so on, until the last month's expenditure (September) which was not outstanding since the building was completed at the start of September. The calculation is as follows: [(75,000 * 5) + (75,000 * 4) + (75,000 * 3) + (75,000 * 2) + (75,000 * 1)] / 5 = 375,000 / 5 = $75,000. However, this calculation mistake leads to the incorrect interpretation of how weighted-average accumulated expenditures are typically calculated in this context. The correct approach involves calculating the average of expenditures over the period they were incurred, considering the time value. Given the error in the calculation explanation, the correct answer should reflect the total expenditures made over the period, adjusted for the time value of money. However, without applying a specific interest rate or more detailed timing, the straightforward total of expenditures ($375,000) divided by the number of payments (5) does not accurately reflect the concept of "weighted-average accumulated expenditures" as typically intended in accounting for interest capitalization purposes. The correct approach would involve more detailed timing and interest rate information. Therefore, the explanation provided does not accurately calculate a weighted average based on the typical accounting principles for capitalizing interest, which involves the actual expenditures times the time they were outstanding. The correct answer should reflect an understanding of how expenditures contribute to interest capitalization, which is not accurately captured in the provided choices or explanation.