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Government GRSNT q25

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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455 views3 pages

Government GRSNT q25

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.

Uploaded by

Francesjoyze Lahora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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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