1. AA Company was constructing an asset that qualified for the interest capitalization.

The
construction began at the beginning of the current year and was completed at the end
of current year. The construction cost totaled P12, 000,000 and was incurred evenly
during the current year. The entity had outstanding notes payable during the entire year
of construction compromising P6, 000,000 8% interest and P9, 000,000 9% interest.
None of the borrowings were specified for the construction of the qualified asset.

1. What amount of interest should be capitalized?

2. What amount should be reported as interest expense for the current year?

aa company Principal Interest

8% np 6,000,000.00 480,000.00

9% np 9,000,000.00 810,000.00

15,000,000.00 1,290,000.00 0.086

Expenditures

Average expenditure 12,000,000.00

2

6,000,000.00

Rate of capitalization 0.086

Capitalizable inrest 516,000.00

Total interest 1,290,000.00

Capitalizable inrest (516,000.00)

774,000.00