# capitalization of interest Q

During the current year, a firm has been constructing a building to be used for its production facility. The average cost of the building in process is \$1 million. The firm has borrow \$500,000 at 5% to finance this construction. The firm has \$3 million of 10% debentures outstanding. Calculate the amount of interest that should be capitalized and the amount that should be expensed.

expense = all of it. 25000 + 300000 325K interest with building has to be expensed as i understand.

\$500,000x0.05 = \$25,000

I will wait 5 mins to post answer, there are 2 #'s you should be figuring out the amount capitalized and amount expensed

is the 300k go as CFF??

US GAAP requires the capitalization of interest costs during the construction period

\$25,000 interest capitalized \$300,000 expensed

\$500k is expensed.

expense half of it and capitalize other half. 12500, and 12500 fcuk i dont know this.

Borrowed: - Directly finance construction: 500000 at 5% - Other source: 3000000 at 10% deventures Solution: - Interest on the construction debt: 25000 - balance at which further interest can be capitalized=1m - 500.000 = 500.000 Total capitalized interest: 25000 + 50000 = 75000 Interest expensed= 250000

Nice strange!!! Haven’t seen many capitalization on interest Q’s on here so I thought I would throw one on NICE JOB!

getterdone Wrote: ------------------------------------------------------- > Nice strange!!! Haven’t seen many capitalization > on interest Q’s on here so I thought I would throw > one on NICE JOB! Thanks… this one is tricky.

good job strangedays what it boils down to is knowing whether or not the interest on the pre-existing debenture can be capitalized i assumed it couldnt

I am lost on this one…

supersharpshooter Wrote: ------------------------------------------------------- > good job strangedays > > what it boils down to is knowing whether or not > the interest on the pre-existing debenture can be > capitalized > > i assumed it couldnt Only the one related to the asset I assume

Look up page 352 of your book 3. its all written there in second paragraph. ALMOST IMPOSSIBLE TO REMEMBER!!!

Thanks.

strange - that was awesome

strangedays Wrote: ------------------------------------------------------- > Borrowed: > - Directly finance construction: 500000 at 5% > - Other source: 3000000 at 10% deventures > > Solution: > > - Interest on the construction debt: 25000 > > - balance at which further interest can be > capitalized=1m - 500.000 = 500.000 > > Total capitalized interest: 25000 + 50000 = > 75000 > > Interest expensed= 250000 1. Total capitalized interest: 25000 + 50000 = 75000 Shouldn’t it be 500,000? and total capitalized amount is 5,250,000 2. Interest expensed= 250000. Where does this number come from? If 10% of \$3M debenture is expensed, it’s \$300,000 Confused, thank you for clarification.

> > 1. Total capitalized interest: 25000 + 50000 = > 75000 > Shouldn’t it be 500,000? and total capitalized > amount is 5,250,000 > > 2. Interest expensed= 250000. Where does this > number come from? If 10% of \$3M debenture is > expensed, it’s \$300,000 > > Confused, thank you for clarification. Hopetobeat, A review of book and study notes is due for you. I don’t mean it in an insulting way, but as you can tell no one got this question except strange, mostly because no one of us remember when to capitalize and when not to capitalize and when you are capitalizing, sometimes you can even capitalize interest from your existing debt. Pg 352 is what you need from book 3!!!