Question
JKL Enterprises Inc. (JKL), a publicly accountable entity, constructed a new manufacturing facility. The project began in the fall of 20X6 with an environmental assessment.
JKL Enterprises Inc. (JKL), a publicly accountable entity, constructed a new manufacturing facility. The project began in the fall of 20X6 with an environmental assessment. Engineering and design work was done in January 20X7. Construction on the new facility began in May 20X7. All activities were substantially completed by October 31, 20X7.
JKL received and paid the following invoices related to building the manufacturing facility:
Invoice date Amount before taxes Date paid
Environmental assessment November 30, 20X6 $ 273,500 December 31, 20X6
March 31, 20X7 136,000 April 30, 20X7
$ 409,500
Engineering January 15, 20X7 $ 235,000 February 15, 20X7
$ 235,000
Construction May 31, 20X7 $ 1,250,000 June 30, 20X7
June 30, 20X7 3,571,000 July 31, 20X7
July 31, 20X7 9,500,000 August 31, 20X7
August 31, 20X7 15,000,000 September 30, 20X7
September 30, 20X7 10,000,000 October 31, 20X7
October 31, 20X7 7,500,000 November 30, 20X7
$46,821,000
Total $47,465,500
During construction, JKL had various outstanding long-term debts and bonds payable. JKL had a $75 million bond that was issued on January 1, 20X1, and will mature 15 years after the issue date. On May 1, 20X7, JKL issued a $25 million bond that will mature in 20 years.
Following is a summary of the long-term debt and bonds held by JKL:
Bonds Series A Bonds Series B Long-term debt
Bonds $75,000,000 $25,000,000 $62,000,000
Interest rate 5.50% 6.00% 5.85%
Issue date January 1, 20X1 May 1, 20X7 June 1, 20X1
Maturity date 15 years after issue date 20 years after issue date 10 years after issue date
JKLs year end is October 31. All borrowings entered into by the company were general borrowings. What amount of interest will JKL capitalize as part of the capital cost of the new manufacturing facility? (In calculating the capitalization rate of interest, round your figure to four decimal places for example, X.XXXX%.)
a) $261,893 b) $263,003 c) $451,297 d) $453,209
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