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 $1,250,000. The firm has borrowed $750,000 at 6 percent interest to finance this construction. It has $2,500,000 of 10 percent debentures and $500,000 of 7.5 percent mortgage debt outstanding. What is the capitalized construction interest and the total interest expense? Capitalized Interest Total Interest Expense A) $75,000 $332,500. B) $95,000 $332,500. C) $75,000 $237,500. D) $95,000 $237,500.
Capitalized interest = 750,000*6% + (1,250,000-750,000)*10% = 45,000+50,000 = 95,000 Total interest expense = 750,000*6% + 2,500,000*10% + 500,000*7.5% - Capitalized interest = 332,500 - 95,000 = 237,500. The answer is C
I’d go with D. Capitalized interest = [750,000 * 6%] + [500,000*10%] = 95,000 Total Interest Expense = [2,000,000*10%] + [500,000*7.5%] = 237,500 I beleive 750,000 @ 6% is straight forward, the remaining 500,000 can be tricky. If the 500,000 debt wasn’t mortgage debt, and general debt, I would have taken the WA cost of debt for the remaining.
Maratikus…don’t you mean D aswell, your calculations show 95,000 & 237,500
yes, i meant D 