Capitalization of Interest Cos Example  Construction began January   Amount Annual interest rate Specific borrowing    Other borrowing    Other borrowing       Annual construction expenditures
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Capitalization of Interest Cos Example Construction began January Amount Annual interest rate Specific borrowing Other borrowing Other borrowing Annual construction expenditures

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Capitalization of Interest Cos Example Construction began January Amount Annual interest rate Specific borrowing Other borrowing Other borrowing Annual construction expenditures




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Presentation on theme: "Capitalization of Interest Cos Example Construction began January Amount Annual interest rate Specific borrowing Other borrowing Other borrowing Annual construction expenditures"— Presentation transcript:


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Capitalization of Interest Cos Example 1 Construction began January 1, 2006 Amount Annual interest rate Specific borrowing $ 2,000,000 8% Other borrowing $ 15,000,000 10% Other borrowing $ 25,000,000 12% 2006 2007 2008 Annual construction expenditures $ 6,000,000 $ 12,000,000 $ 3,000,000 (incurred evenly during the year) Facility became ready for use April 30, 2008 Facility started production July 1, 2008 Step 1: Weighted average interest rat Amount Annual interest rate Specific borrowing $ 2,000,000 8% Amount Annual interest rate Annual interest cost Other borrowing $ 15,000,000 10% $ 1,500,000 Other borrowing $ 25,000,000 12% $ 3,000,000 Total $ 40,000,000 11.25% $ 4,500,000 Weighted average interest rate $4,500,000 / $40,000,000 = 11.25% Step 2: Average cumulative expenditure 2006 2007 2008 Beginning accumulated expenditures $ - $ 3,272,500 $ 10,250,656 Expenditures incurred during the year $ 6,000,000 $ 12,000,000 $ 3,000,000 C=A+B Ending accumulated expenditures $ 6,000,000 $ 15,272,500 $ 13,250,656 D=(A+C)/2 Average accumulated expenditures $ 3,000,000 $ 9,272,500 $ 11,750,656 E Interest cost to be capitalized $ 272,500 $ 978,156 $ 418,983 F=C+E Accumulated expenditures after interest capitalization $ 3,272,500 $ 10,250,656 $ 12,169,639 Interest cost to be capitalized Borrowing amount Interest rate Interest cost Number of months Interest to be capitalized $ 2,000,000 8% $ 160,000 $ 1,000,000 11.25% $ 112,500 2006 $ 3,000,000 $ 272,500 12 $ 272,500 $ 2,000,000 8% $ 160,000 $ 7,272,500 11.25% $ 818,156 2007 $ 9,272,500 $ 978,156 12 $ 978,156 $ 2,000,000 8% $ 160,000 $ 9,750,656 11.25% $ 1,096,949 2008 $ 11,750,656 $ 1,256,949 $ 418,983 (January 1 - April 30) Copyright 1999-2009 by AccountingStudy.com. TM Page 1 of 1