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  • Government GRSNT q25

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    Francesjoyze Lahora
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    Sun Company constructed an asset over the course of the current year at a total cost of $12 million incurred evenly. The company had $6 million in notes payable at 8% interest and $9 million at 9% interest, for a total interest cost of $1.29 million. What amount of interest should be capitalized? $516,000, which is calculated as the average interest rate of 8.6% multiplied by the average expenditures of $6 million. What amount should be reported as interest expense? $774,000, which is the total interest incurred of $1.29 million minus the capitalized interest of $516,000.

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    Government Grsnt q25

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    Sun Company constructed an asset over the course of the current year at a total cost of $12 million incurred evenly. The company had $6 million in notes payable at 8% interest and $9 million at 9% interest, for a total interest cost of $1.29 million. What amount of interest should be capitalized? $516,000, which is calculated as the average interest rate of 8.6% multiplied by the average expenditures of $6 million. What amount should be reported as interest expense? $774,000, which is the total interest incurred of $1.29 million minus the capitalized interest of $516,000.

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    19 views3 pages

    Government GRSNT q25

    Uploaded by

    Francesjoyze Lahora
    Sun Company constructed an asset over the course of the current year at a total cost of $12 million incurred evenly. The company had $6 million in notes payable at 8% interest and $9 million at 9% interest, for a total interest cost of $1.29 million. What amount of interest should be capitalized? $516,000, which is calculated as the average interest rate of 8.6% multiplied by the average expenditures of $6 million. What amount should be reported as interest expense? $774,000, which is the total interest incurred of $1.29 million minus the capitalized interest of $516,000.

    Copyright:

    © All Rights Reserved
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    of 3

    Problem 25-3(AICPA Adapted)

    Sun Company was constructing an asset that qualified for 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 comprising

    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?

    a. 480,000

    b. 516,000

    c. 810,000

    d. 960,000

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

    a. 960,000

    b. 645,000

    c. 774,000

    d. 0

    Solution 25-3

    Question 1 Answer b

    If the construction is financed by general borrowing, the average interest rate is multiplied by

    average expenditures in computing capitalizable borrowing cost.

    Principal Interest

    8% note payable (8% x 6,000,000) 6,000,000 480,000

    9% note payable (9% x 9,000,000) 9,000,000 810,000


    Total 15,000,000 1,290,000

    Average interest rate (1,290,000/15,000,000) 8.60%

    Average expenditures (12,000,000 / 2) 6,000,000

    Capitalizable interest (6,000,000 x 8.6%) 516,000

    Question 2 Answer c

    Total interest incurred

    1,290,000

    Capitalizable interest ( 516,000)

    Interest expense for the year 774,000

    Problem 25-4 (AICPA Adapted)

    Marian Company borrowed P20,000,000 at 10% partly for general purposes and partly to finance

    the construction of a building on January 1, 2019. The loan shall be repaid commencing the

    month following completion of the building.

    Expenditures incurred evenly during the year for the completed building totaled P12,000,000 oh

    December 31, 2019. The entity eamed interest of P200,000 for the year on the unexpended

    portion of the loan.

    What amount of interest is capitalized on December 31,2019?

    a. 1,200,000

    b. 1,000,000

    c. 600,000

    d. 400,000

    Solution 25-4 Answer c

    The average expenditures amount to P12,000,000 divided by 2 or P6.000,000. The interest is

    P6,000,000 times 10% or P600,000.

    The investment income of P200,000 is ignored because the construction is financed by general
    borrowing.

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