3.99 See Answer

Question: The following three situations involve the


The following three situations involve the capitalization of interest.
Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed $4,000,000 payable in 10 annual installments of $400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling $1,500,000 under the contract; the weighted average amount of accumulated expenditures was $800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $250,000.

Instructions
What amount should Oksana Baiul report as capitalized interest at December 31, 2017?

Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

Interest Costs Incurred
Warehouse constructed for Ito’s own use……………………………………. $30,000
Special-order machine for sale to unrelated customer, produced according
to customer’s specifications……………………………………………………………. 9,000
Inventories routinely manufactured, produced on a repetitive basis…. 8,000

All of these assets required an extended period of time for completion.

Instructions
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed $10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled $7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $650,000 for the year.

Instructions
How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2018?

3.99

See Answer