Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2017 and was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during 2017:

Date Payment
June 1, 2017 $2,000,000
August 31, 2017 3,000,000
December 31, 2017 2,500,000
In order to help finance the construction, Dobbs issued $1,700,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest payable annually on May 31. In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $425,000, 12% note payable dated January 1, 2013, and due January 1, 2023, with interest payable annually on January 1.

Compute the amounts of each of the following (show computations):

- Weighted-average accumulated expenditures qualifying for capitalization of the interest cost.

- Avoidable interest incurred during 2017.

- The total amount of interest cost to be capitalized in 2017.

1.$2,166,667

2.$204,000

3.$140,250

Explanation:

1.Weighted-Average accumulated expenditure

DateAmountCapitalization period

Weighted Average Accumulated Expenditures

01 June 2017$2,000,0007/12$1,166,667

31 August 2017$3,000,0004/12$1,000,000

31 December 2017$2,500,0000/7$0

Total$7,500,000 $2,166,667

2.

Computation of Avoidable Interest

DebtWeighted Average Accumulated ExpendituresInterest rateAvoidable

Interest amount

From 9% Bond$1,700,0009%$153,000

From 12% Note$425,00012%$51,000

Totals$2,125,000 $204,000

3.

Computation of Actual Interest cost incurred

DebtWeighted Average Accumulated ExpendituresInterest rateActual Interest

From 9% Bond$1,700,0009%×7÷12 $89,250

From 12% Note$425,00012%$51,000

Totals$2,125,000 $140,250

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