【正文】 insurance Less: Proceeds from sale of salvaged materials Cost of Land $400,000 50,000 10,000 12,000 8,000 $464,000 2. Answer: 12 B. Capitalization of Interest Costs 13 B Capitalization of Interest Costs 1. Definition a) Capitalize interest as part of the cost of certain assets Dr. Interest Expense Cr. Cash Dr. Asset Cr. Interest expense ( part of fixed assets cost) 14 B Capitalization of Interest Costs 2. Qualifying Assets a) Assets which require a period of time to be prepared for use b) Nonqualifying assets include: ? Assets not being used nor being readied for use (ex. idle equipment, idle land) ? Routinely produced inventories ? Assets ready for their intended use when acquired Building purchased by an entity Interest associated with the purchase loan cannot be capitalized Building constructed over a period of time by an entity or outside constructors BUT: Interest associated with the construction loan could be capitalized 15 B Capitalization of Interest Costs 3. When to Capitalize Interest (all three must be met) a) Expenditures for asset have been made b) Activities intended to get asset ready are in progress c) Interest cost is being incurred 4. When interest capitalization period ends a) When the asset is substantially plete b) Normal interruptions and delays do not suspend capitalization c) Intended interruptions and delays do suspend capitalization Construction begins Construction ends Expense interest Capitalize interest Expense interest 16 B Capitalization of Interest Costs 5. How Much Interest Cost is Capitalized Avoidable interest = Weightedavg acc. exp X Interest rate X Construction period ① ② ③ ① Weightedavg expenditure = ∑ (ACC EXP X % of periods) ② Interest rate Explicit rate Avg rate = a) Formula ③ Construction period Int Exp for loan 1 + Int Exp for loan 2 + … Loan 1 + Loan 2 + … = construction begins to construction substantially pleted If more loans with different rate used b) Capitalized interest cannot exceed total interest costs incurred during the entire reporting period c) The interest earned on these funds must be recognized as revenue and may not be offset against the interest expense to be capitalized 17 B Capitalization of Interest Costs 6. Example Assume the pany is constructing an asset which qualifies for interest capitalization. By the JULY BEG $3,000,000 had spent on the asset, and an additional $800,000 was spent during JULY. The following debt was outstanding during the entire month a) A loan of $2,000,000, interest of 1% per month, specifically related to the asset b) A N/P of $1,500,000, interest of % per month c) Bonds PAY of $1,000,000, interest of 1% per month Avoidable interest = Weightedavg. acc. Exp. X Interest rate X Construction period Answer: ① ② ③ 18 B Capitalization of Interest Costs 6. Example Assume the pany is constructing an asset which qualifies for interest capitalization. By the JULY BEG $3,000,000 had spent on the asset, and an additional $800,000 was spent during JULY. The following debt was outstanding during the entire month a) A loan of $2,000,000, interest of 1% per month, specifically related to the asset b) A N/P of $1,500,000, interest of % per month c) Bonds PAY of $1,000,000, interest of 1% per month Weightedavg acc. exp = (Acc Exp BEG + Acc Exp END) / 2 Answer: = ($3,000,000 + $3,800,000) / 2 = $3,400,000 ① 19 B Capitalization of Interest Costs 6. Example Assume the pany is constructing an asset which qualifies for interest capitalization. By the JULY BEG $3,000,000 had spent on the asset, and an additional $800,000 was spent during JULY. The following debt was outstanding during the entire month a) A loan of $2,000,000, interest of 1% per month, specifically related to the asset b) A N/P of $1,500,000, interest of % per month c) Bonds PAY of $1,000,000, interest of 1% per month Interest rate = % for $2,000,000 loan specifically related to the asset Answer: ② Avg interest rate = $1,500,000 X % + $1,000,000 X 1% $1,500,000 + $1,000,000 Int Exp for loan 1 + Int Exp for loan 2 + … Loan 1 + Loan 2 + … = = % 20 B Capitalization of Interest Costs 6. Example Assume the pany is constructing an asset which qualifies for interest capitalization. By the JULY BEG $3,000,000 had spent on the asset, and an additional $800,000 was spent during JULY. The following debt was outstanding during the entire month a) A loan of $2,000,000, interest of 1% per month, specifically related to the asset b) A N/P of $1,500,000, interest of % per month c) Bonds PAY of $1,000,000, interest of 1% per month Answer: Avoidable interest = $2,000,000 X 1% + (3,400,000 $2,000,000) X % = $38,200 Act interest incurred = $2,000,000 X 1% + $1,500,000 X % + $1,000,000 X 1% = $52,500 Since avoidable interest act interest incurred, all amount $38,200 should be capitalized 21 B Capitalization of Interest Costs 6. Example Assume the pany is constructing an asset which qualifies for interest capitalization. By the JULY BEG $3,000,000 had spent on the asset, and an additional $800,000 was spent during JULY. The following debt was outstanding during the entire month a) A loan of $2,000,000, interest of 1% per month, specifically related to the asset b) A N/P of $1,500,000, interest of % per month c) Bonds PAY of $1,000,000, interest of 1% per month Answer: To record interest expense paid Dr. Interest Exp $38,200 Cr. Cash $38,200 To record interest capitalization Dr. Asset $38,200 Cr. Interest Exp $38,200 22 Question Time… 1. Cole Co. began constructing a building for its own use in 01/01/08. During 2020, Cole incurred interes