On January 1, 2021, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2022. Construction expenditures for 2021, which were incurred evenly throughout the year, totaled $6,300,000. Marjlee had the following debt obligations which were outstanding during all of 2021:Construction loan, 10% $ 1,800,000 Long-term note, 9% 2,400,000 Long-term note, 6% 4,800,000 Required:Calculate the amount of interest capitalized in 2021 for the building using the specific interest method.

The correct answer is $274,500.

Explanation:

According to the scenario, the computation can be done as follows:

The total expenditure for two years = $6,300,000.

So,Average Expenditure  = $6,300,000 ÷ 2 = $3,150,000

Now, we compute weighted average interest rate of Long term loan, then,

Debt                            Interest             Amount                  interest amount

Long-term note,             9%                $2,400,000                   $216,000

Long-term note,             6%                $4,800,000                   $288,000

                               Total amount     $7,200,000 Total interest= $504,000

So, Weighted average interest rate = Total interest ÷ Total amount

= $504,000 ÷ $7,200,000

= 0.07

= 7%

So, Capitalized interest = ( Construction loan amount × Construction loan percentage) + [ ( Average Expenditure - Construction loan amount) × Weighted average interest rate ]

= ( $1,800,000 × 10%) + [($3,150,000 - $1,800,000 ) × 7%]

=  $180,000 + $94,500

= $274,500

Hence, the amount of interest capitalized in 2021 for the building is $274,500.

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