Capitalization of Interest
Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified as a separate discrete job in the accounting records. At the end of 2007, Oceanwide correctly reported $5,400,000 as Construction in Progress on the following jobs.
|
|
Accumulated Costs |
|
Completion Date |
(including 2007 interest) |
Ship |
(end of month) |
December 31, 2007 |
340 |
October 31, 2007* |
$2,300,000 |
341 |
June 30, 2008 |
1,150,000 |
342 |
September 30, 2008 |
1,200,000 |
343 |
January 31, 2009 |
750,000 |
Construction costs for 2008, and the dates the expenditures were made, were as follows:
Ship |
Date |
Costs |
341 |
April 1, 2008 |
$1,200,000 |
342 |
May 1, 2008 |
1,600,000 |
343 |
July 1, 2008 |
2,200,000 |
344 |
September 1, 2008 |
810,000 |
345 |
November 1, 2008 |
360,000 |
Ocean wide had the following general liabilities at December 31, 2008:
12%, 5 year note (maturity date—2010) |
$2,000,000 |
10%, 10 year bonds (maturity date—2013) |
8,000,000 |
On January 1, 2008, Ocean wide borrowed $2,000,000 specifically for the construction of ship 343.The loan was for three years with interest at 13%.
Instructions:
1. Compute the maximum interest that can be capitalized in 2008.
2. Compute the weighted average interest rate for the general liabilities for 2008.
3. Compute the interest that Ocean wide should capitalize during 2008.