A firm has spent the last two years constructing a building to be used as the firm's headquarters. At the end of the first year of construction, the balance of building under construction was $400,000, which includes capitalized interest. During year two, the firm paid $240,000 to the contractor on March 1, and $600,000 on October 1. The building was not finished by the end of the second year. The firm had one loan outstanding all year, an 8%, $3,000,000 construction loan. Compute capitalized interest for year two.

$60,000

Explanation:

Given:

Amount at the end of 1st year = $400,000

Paid : $240,000 (on 1st March)

         $600,000 (on 1st October)

rate = 8%

Calculation of Capitalized interest

= Weighted Amount Borrowed x Interest rate

= $350,000 x 8% = $28,000

Note: Weighted Amount Borrowed = $240000 x 10/12 = $200,000

                                                           = $600,000 x 3/12 = $150,000

Total = $350,000

For the first year = $400,000 x 8% = $32,000

Total Capitalized Interest Amount = $28,000 + $32,000

                                                        = $60,000

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