Date Expenditures Specific General Mos.

Average
Outstanding
7/1/06 200,000 200,000 N/A
9/30/06 600,000 500,000 100,000 N/A ; 9/12 75,000
3/31/07 1,200,000 1,200,000 3/12 300,000
6/30/07 200,000 200,000 0/12 -
Totals 2,200,000 700,000 1,500,000 375,000

Total interest expense on general borrowings

(1M x 12.5%) + (1.5M + 10%) 275,000
Divide by: Total general borrowings (1M + 1.5 M) __2,500,000__
Capitalization rate ____11%____

Specific Borrowing:
Interest expense on specific borrowing (given) 65,000
Less: Investment income earned on specific borrowing __(20,000)__
Borrowing cost from specific borrowing __45,000__

General Borrowing:
Average expenditures 375,000
Multiply by: Capitalization rate ______11%_
Borrowing cost from general borrowing __41,250__
Borrowing cost eligible for capitalization __86,250__