On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,410,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2014, to finance the construction cost, Oksana Baiul borrowed $4,410,000 payable in 10 annual installments of $441,000, plus interest at the rate of 10%. During 2014, Oksana Baiul made deposit and progress payments totaling $1,653,750 under the contract; the weighted-average amount of accumulated expenditures was $881,999 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $268,000. What amount should Oksana Baiul report as capitalized interest at December 31, 2014?

$88,199

Explanation:

Given:

Amount borrowed = $4,410,000

Payable in 10 annual installments of $441,000

Interest rate = 10%

Weighted average accumulated expenses = $881,999

All expenses are made from this borrowed amount.

Find avoidable interest for the period:

Weighted Average Rate of interest * Weighted average accumulated expenses

= 10% * $881,999

= $88,199

Find the actual interest paid during the period:

= 10% * $4,410,000

= $441,000

The capitalized interest at December 31, 2014 would be the avoidable interest, since it isn't more than the actual interest.

Thus, capitalized interest at December 31, 2014 is $88,199

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