26 Interest Costs During Constructio Comprehensive Illustration: On November 1, 2016, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2017. January 1 $210,000 March 1 $300,000 May 1 $540,000 December 31 $450,000 Total $1,500,000 L 10-27 Interest Costs During Construction onl Pfeifer Construction completed the building, ready for occupancy, on December 31, 2017. Shalla had the following debt outstanding at December 31, 2017. Specific Construction Debt 1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2016, with interest payable annually on December 31 Other Debt 2. 10%, 5-year note payable, dated December 31, 2013, with interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2012, with interest payable annually on December 31 $750,000 $550,000 $600,000 Compute weighted-average accumulated expenditures for 2017. Interest Costs During Construction Compute weighted-average accumulated expenditures for 2017. Expenditures Current-Year Capitalization Date Amount Period January 1 $ 210,000 March 1 300,000 May 1 540.000 December 31 450,000 $1,500,000 ILLUSTRATION 10-4 Computation of Weighted-Average Accumulated Expenditures 10-28 LO3 Weighted Average Accumulated Expenditures LO3 Interest Costs During Construction Compute the avoidable interest. Weighted Average Accumulated Expenditures $750,000 70,000 $820,000 Interest Rate Avoidable Interest The amount by which the weighted average accumulated expenditures exceeds the specific construction loan Wegrced-average interest rate computation 10% 5-year note Principal 12%, 10-year bonds $ 550.000 600.000 $1.150 000 Interest $ 55.000 72.000 $127 000 Weighted average interest rate Total interest Totul principal ILLUSTRATION 10-5 10-29 Computation of Avoidable interest 10-30 LO3 Interest Costs During Construction cont Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2017. ILLUSTRATION 10-5 Computation of Actual Interest Cost Construction note $750,000 x.15-$112,500 5-year note $550,000 x 10 = 55,000 10-year bonds $600,000 x.12 = 72,000 Actual interest $239,500 The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228. LO3