You are building a building for your own use. You borrow $3,000,000 for construction at 9% interest rate. You break ground on January 2nd. You make the following payments: February 1st$3,000,000 May 1st$2,000,000 August 1st$2,400,000 November 1st$1,200,000 December 30th$1,000,000 You have other loans on your balance sheet that look like this - a) $3,000,000,5yr loan at 8% b) $4,000,00010yr loan at 9.5% c) $2,000,0002yr loan at 6% d) $1,000,0003yr loan at 9% 1) Step #1 - Compute the weighted average expenditures (look at page 561) 2) Step #2-Compare the answer you just calculated to your direct loan. If your direct loan is bigger, this is easy, just multiply the direct loan times its interest rate and that's the amount to be capitalized. If not, then you need to do this next step. You have to compute the weightedaverage interest rate (of course you will have to do this next step on the test, look at the top of page 562). 3) Calculate avoidable interest (look at the box at the top of page 563) 4) Now compare avoidable interest to actual interest of all loans, take the lower (which is always "avoidable interest"). This is the amount to be capitalized (that means added to the asset account. Use a T-account, your total will be all the payments you made for the construction of the building (look at your payments on Feb 1st, May 1st, Aug 1st etc) 5) Make the journal entry to reflect the payment of all interest. The journal entry will look like this \( \begin{array}{ll}\text { Interest Expense } & \operatorname{XXX} \text { (this number will be a plug) } \\ \text { Building } & \operatorname{XXX} \text { (the number you calculated in #4) } \\ \text { Cash } & \mathrm{XXX} \mathrm{(the} \mathrm{total} \mathrm{you} \mathrm{used} \mathrm{in} \mathrm{calculating} \mathrm{#2} \mathrm{PLUS} \mathrm{the} \\ & \text { interest on the direct construction loan) }\end{array} \) Check figures - Weighted Average Expenditures - \$5,283,333 Weighted Average Interest Rate 8.3% Avoidable Interest - \$459,517 All interest - $1,100,000 You are building a building for your own use. You borrow $3,000,000 for construction at 9% interest rate. You break ground on January 2nd. You make the following payments: February 1st$3,000,000 May 1st$2,000,000 August 1st$2,400,000 November 1st$1,200,000 December 30th$1,000,000 You have other loans on your balance sheet that look like this - a) $3,000,000,5yr loan at 8% b) $4,000,00010yr loan at 9.5% c) $2,000,0002yr loan at 6% d) $1,000,0003yr loan at 9% 1) Step #1 - Compute the weighted average expenditures (look at page 561) 2) Step #2-Compare the answer you just calculated to your direct loan. If your direct loan is bigger, this is easy, just multiply the direct loan times its interest rate and that's the amount to be capitalized. If not, then you need to do this next step. You have to compute the weightedaverage interest rate (of course you will have to do this next step on the test, look at the top of page 562). 3) Calculate avoidable interest (look at the box at the top of page 563) 4) Now compare avoidable interest to actual interest of all loans, take the lower (which is always "avoidable interest"). This is the amount to be capitalized (that means added to the asset account. Use a T-account, your total will be all the payments you made for the construction of the building (look at your payments on Feb 1st, May 1st, Aug 1st etc) 5) Make the journal entry to reflect the payment of all interest. The journal entry will look like this \( \begin{array}{ll}\text { Interest Expense } & \operatorname{XXX} \text { (this number will be a plug) } \\ \text { Building } & \operatorname{XXX} \text { (the number you calculated in #4) } \\ \text { Cash } & \mathrm{XXX} \mathrm{(the} \mathrm{total} \mathrm{you} \mathrm{used} \mathrm{in} \mathrm{calculating} \mathrm{#2} \mathrm{PLUS} \mathrm{the} \\ & \text { interest on the direct construction loan) }\end{array} \) Check figures - Weighted Average Expenditures - \$5,283,333 Weighted Average Interest Rate 8.3% Avoidable Interest - \$459,517 All interest - $1,100,000
