Example 10-10:

Construction starts on 1/1/06 and ends on 10/1/07.

Expenditures on the project:

1/1/06: $1,000,000

3/1/06: $1,600,000.

6/30/06: $1,800,000.

10/1/06: $600,000.

4/30/07: $585,000.

8/31/07: $900,000.

Company has a construction loan of $3,000,000 outstanding during 2006 and 2007. Interest rate on this loan is 10%.

Company also had long term loans of $4,000,000 and $6,000,000 with interest rates of 6% and 8% respectively during 2006 and 2007.

Required:

• Amount of interest that the company should capitalize in 2006 and 2007 using the specific interest method.
• Total cost of building.
• Amount of interest expense that will appear in the 2006 and 2007 income statements.