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On June 1,2015,the Crocus Company began construction of a new manufacturing plant.The plant was completed on October 31,2016.Expenditures on the project were as follows ($ in millions):
On July 1,2015,Crocus obtained a $70 million construction loan with a 6% interest rate.The loan was outstanding through the end of October,2016.The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%.This note was outstanding during all of 2015 and 2016.The company's fiscal year-end is December 31.
-What is the amount of interest that Crocus should capitalize in 2015,using the specific interest method?

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On June 1,2015,the Crocus Company began construction of a new manufacturing plant.The plant was completed on October 31,2016.Expenditures on the project were as follows ($ in millions):
  On July 1,2015,Crocus obtained a $70 million construction loan with a 6% interest rate.The loan was outstanding through the end of October,2016.The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%.This note was outstanding during all of 2015 and 2016.The company's fiscal year-end is December 31.
-What is the amount of interest that Crocus should capitalize in 2015,using the specific interest method?

Quizplus · Accepted Answer

The amount of interest that should be capitalized in 2015 can be calculated as follows:
Total interest = (construction loan interest + long-term note interest) x (time-weighted average of accumulated construction expenditures)
= [(70 million x 6% x 6/12) + (100 million x 8%)] x (5/12)
= (2.1 million + 8 million) x 5/12
= 1.95 million
Therefore, the correct answer is B) $1.95 million.

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