P10-7B (L04) (Capitalization of Interest) Phipps Inc. is a large scale bakery that had been operating in its original facility since 1960. The increase in designer cakes and the popularity of cooking shows on cable has contributed to an annual growth rate of 15% for Phipps since 2013. Phipps' original facility became obsolete by early 2017 because of the increased sales volume and the fact that Phipps markets their bakery products world-wide. On July 1, 2017, Phipps contracted with Cakes Construction to have a new bakery constructed for $2,000,000 on land owned by Phipps. The payments made by Phipps to Cakes Construction are shown in the schedule below. Date August 1, 2017 November 30, 2017 April 30, 2018 Total payments Amount $ 500,000 840,000 660,000 $2,000,000 Construction was completed and the building was ready for occupancy on April 29, 2018. Phipps had no new borrowings directly associated with the new building but had the following debt outstanding at April 30, 2018, the end of its fiscal year. 8%, 10-year note payable of $1,000,000, dated January 1, 2014, with interest payable annually on December 31. 6%, 20-year bond issue of $2,000,000 sold at par on July 1, 2003, with interest payable annually on June 30. The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Instructions (a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period. (b) Compute the avoidable interest on Phipps' new building. (c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018. (1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements. (2) Compute the amount of each of the items that must be disclosed. P10-7B (L04) (Capitalization of Interest) Phipps Inc. is a large scale bakery that had been operating in its original facility since 1960. The increase in designer cakes and the popularity of cooking shows on cable has contributed to an annual growth rate of 15% for Phipps since 2013. Phipps' original facility became obsolete by early 2017 because of the increased sales volume and the fact that Phipps markets their bakery products world-wide. On July 1, 2017, Phipps contracted with Cakes Construction to have a new bakery constructed for $2,000,000 on land owned by Phipps. The payments made by Phipps to Cakes Construction are shown in the schedule below. Date August 1, 2017 November 30, 2017 April 30, 2018 Total payments Amount $ 500,000 840,000 660,000 $2,000,000 Construction was completed and the building was ready for occupancy on April 29, 2018. Phipps had no new borrowings directly associated with the new building but had the following debt outstanding at April 30, 2018, the end of its fiscal year. 8%, 10-year note payable of $1,000,000, dated January 1, 2014, with interest payable annually on December 31. 6%, 20-year bond issue of $2,000,000 sold at par on July 1, 2003, with interest payable annually on June 30. The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. Instructions (a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period. (b) Compute the avoidable interest on Phipps' new building. (c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018. (1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements. (2) Compute the amount of each of the items that must be disclosed
