EXERCISE 10-8B (20–25 minutes)

(a) Computation of Weighted-Average Accumulated Expenditures

Expenditures
Capitalization Weighted-Average
Date Amount X Period = Accumulated Expenditures
June 1 $ 400,000 7/12 $ 233,333
July 1 600,000 6/12 300,000
September 1 1,200,000 4/12 400,000
December 1 600,000 1/12 50,000
$2,800,000 $ 983,333
Computation of Avoidable Interest
Weighted-Average
Accumulated Expenditures X Interest Rate = Avoidable Interest
$983,333 10% (Construction loan) $98,333
Computation of Actual Interest
Actual interest
$1,000,000 X 10% $100,000
$10,000,000 X 8% 800,000
$2,500,000 X 10% 250,000
$1,150,000

Note: Use avoidable interest for capitalization purposes because it is lower than
actual interest.

(b) Buildings ..........................................................................

98,333
Interest Expense* ............................................................
1,051,667
Cash ........................................................................ 1,150,000

*Actual interest for year $1,150,000

Less: Amount capitalized (98,333)
Interest expense debit $1,051,667