A company made the following cash expenditures on a self-constructed building begun January 1 of the current year: The building is still under construction at year-end.What is the amount of the average accumulated expenditures for the purpose of capitalizing interest?
A) $87,500
B) $92,500
C) $100,000
D) $200,000

Question

A company made the following cash expenditures on a self-constructed building begun January 1 of the current year:  The building is still under construction at year-end.What is the amount of the average accumulated expenditures for the purpose of capitalizing interest?
A) $87,500 
B) $92,500 
C) $100,000 
D) $200,000

Quizplus · Accepted Answer

To capitalize interest, the company must determine the average accumulated expenditures for the period. This is calculated by taking the sum of all expenditures on the asset and dividing it by the number of periods. In this case, the expenditures are $100,000 + $80,000 + $120,000 = $300,000. Since the building is still under construction at year-end, we assume that there are three periods (beginning of the year, middle of the year, and end of the year). Therefore, the average accumulated expenditures are $300,000/3 = $100,000. However, the company can only capitalize interest on the amount of the average accumulated expenditures that is financed with debt. From the information given, we do not know how much was financed with debt, so we must assume that all expenditures were financed with debt. Therefore, the amount of the average accumulated expenditures for the purpose of capitalizing interest is $100,000. Option B is the only one that matches this amount.

A Company Made the Following Cash Expenditures on a Self-Constructed