Agasse Industries began construction of a new facility and took out a $1,500,000, 10% construction loan on April 1, 2021. Agasse made payments to the general contractor of $409,000 on April 1, $909,000 on August 31, and $509,000 on December 31.
Required:
Compute the amount of interest the Agasse would capitalize in 2021.

The amount of interest the Agasse will capitalize in 2021 is $60,975

Explanation:

Interest will be capitalized only for the period when loan amount is used for construction of new facility.

To calculate amount of interest using following method

Total loan amount take on April 1, 2021 = $1,500,000

Payments to supplier:

on April 1, 2021 = $409,000

on August 31, 2021 = $909,000

Remaining Loan on December 31, 2021 = $1,500,000 - $409,000 - $909,000

Remaining Loan on December 31, 2021 = $182,000

Interest on  Payment of

April 1, 2021 = $409,000 x 10% x (9/12) = $30,675

August 31, 2021 = $909,000 x 10% x (4/12) = $30,300

December 31, 2021 = $182,000 x 10% x 0 = $0

Payment of $182,000 is made on the last date of the year so there will be interest charged on this payment which will be capitalized in this year.

Total amount of interest the Agasse will capitalize in 2021 = $30,675 + $30,300 = $60,975

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