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On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):

July 1, 2020 54
October 1, 2020 22
February 1, 2021 30
April 1, 2021 21
September 1, 2021 20
October 1, 2021 6

On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31.

Required:
What is the amount of interest that Crocus should capitalize in 2020, using the specific interest method?

Sagot :

Parrainidn

Based on the average expenditure for the year, the amount of interest that Crocus should capitalize in 2020 is $2.6 million.

To find the amount to be capitalized, you need to find the average expenditure first.

What is the average expenditure for 2020?

= ∑ (Amount spent in year x (Number of months till end of year/ Number of months till end of year since loan was acquired))

Solving gives:

= (54 million x 6 months / 6 months) + (22 million x 3 months / 6 months)

= $65 million

Amount of interest that should be capitalized

= Average expenditure x Interest rate x Period in year since loan was acquired

= 65 x 8% x 6/12 months

= $2.6 million

Find out more on capitalized interest at https://brainly.com/question/417585.

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