On January 1, 2014, Randolf Company signed a contract to have Rory Associates construct a manufacturing facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2014, to finance the construction cost, Randolf borrowed $14,000,000 payable in seven annual installments of $2,000,000 plus interest at the rate of 9%. During 2014, Randolf made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Randolf realized investment income of $330,000. What amount should Randolf report as capitalized interest at December 31, 2014?

Question

Quizplus · Accepted Answer

To determine capitalized interest, we need to first calculate the weighted-average accumulated expenditures. This is calculated by taking the total accumulated expenditures for the year ($3,000,000) and multiplying it by the time-weighted average of the borrowing rate (9%) for the year.

Weighted-average accumulated expenditures = $3,000,000 x 9% = $270,000

Since the actual interest cost incurred during the year ($2,000,000 x 9%) exceeded the weighted-average accumulated expenditures ($270,000), all of the $270,000 can be capitalized as interest.

Therefore, the answer is B) $270,000.

On January 1, 2014, Randolf Company Signed a Contract to Have