Capitalizing interest during construction. Nebok Company recently constructed a new headquarters building. Its Construction-in-Process account showed a balance of $\$ 23,186,000$ on May 31 , Year 9 , and $\$ 68,797,000$ on May 31, Year 10. Construction activity occurred evenly throughout the year. Nebok Company completed construction during Year 11. Nebok Company's note on long-term debt revealed the following (amounts in thousands):

None of this debt relates specifically to construction of the headquarters building. Interest expense before capitalization of interest for the year ending May 31, Year 10, is $\$ 5,480,000$.

a. Compute the amount of interest capitalized in the Construction-in-Process account for the year.

b. Present journal entries for interest for the year.

c. Nebok Company's net income before interest expense and income taxes for the year is $\$ 16,300,000$. Nebok Company is subject to a 35 percent income tax rate. Compute net income for the year ending May 31, Year 10.

d. Compute the interest coverage ratio (equals net income before interest expense and income taxes divided by interest expense) using the amounts computed in part c.

e. Repeat part d using the interest expense before capitalization of interest of $\$ 5,480,000$ in the denominator.

f. Which measure of the interest coverage ratio provides a more appropriate measure for assessing risk?

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May 31 Year 9 Year 10 8.5% unsecured term loan $25,000 $25,000 12.5% loan secured by real estate 15,600 15,100 14.0% loan secured by real estate 10,900 9,600 Total. $51,500 $49,700