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On February 1, 20x4, a publicly accountable entity started the construction of a specialized piece of equipment to use in one of its factories
On February 1, 20x4, a publicly accountable entity started the construction of a specialized piece of equipment to use in one of its factories. The costs incurred on the equipment was as follows: February 1, 20x4 $160,000 April 1, 2004 250,000 August 1, 20x4 300,000 November 30, 20x4 130,000 Construction of the asset was completed on November 30, 20x4 when the asset was put into use. The company's long-term debt structure is as follows: Bank Loan, 5% $20,000,000 Bank Loan. 3.5% 35,000,000 Bonds, 4% 40,000,000 Both Bank Loans were outstanding for the whole year. The bonds were issued on April 1, 20x4. Calculate the amount of borrowing costs that have to be capitalized to the equipment.
Expert Solution
| Date | Expenditure | Weight | Average Amount |
| Feb1 | 160,000* | 10/12 | 133,333 |
| April 1 | 250,000* | 8/12 | 166,667 |
| August 1 | 300,000* | 4/12 | 100,000 |
| November 30 | 130,000* | 0/12 | 0 |
| 400,000 |
Calculation of Averager interest rate for general debt:
| Type | Amount | weight | Rate | interest |
| Bank Loan | 20,000,000 | 12/12 | 5 | 1,000,000 |
| Bank loan | 35,000,000 | 12/12 | 3.5 | 1,225,000 |
| Bonds | 40,000,000 | 8/12 | 4 | 1,066,667 |
| 95,000,000 | 3,291,667 |
Average Interest rate = 3291667/95000000*100 = 3.46%
Calculation of interest capitalized to equipment
Average Accumulated expenditure = 400000*3.46% = $13,840
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