Capitalization of Interest
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12-1 Capitalization of Interest Chapter 12 Illustrated Solution: Problem 12-45
description
Chapter 12. Illustrated Solution: Problem 12-45. Capitalization of Interest. Problem Background. Oceanwide Enterprises, Inc. If a company self-constructs long-lived assets, they may be entitled to capitalize some interest costs as part of the overall cost of the asset. - PowerPoint PPT Presentation
Transcript of Capitalization of Interest
12-1
Capitalization of Interest
Chapter 12Illustrated Solution: Problem 12-45Illustrated Solution: Problem 12-45
12-2
Problem BackgroundProblem Background
Oceanwide Enterprises, Inc.
If a company self-constructs long-lived assets, they may be entitled to capitalize some interest costs as part of the overall cost of the asset.
One of the restrictions is that a company may never capitalize more interest costs than they actually incur (in any fiscal year).
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Part 1: Maximum Interest Capitalized in 2002Part 1: Maximum Interest Capitalized in 2002
Oceanwide Enterprises, Inc.
2002 interest accrued:
12% 5-year note ($2,000,000 x 12% )……………. $ 240,000
10% 10-year bonds ($8,000,000 x 10%)…………. 800,000
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Part 1: Maximum Interest Capitalized in 2002Part 1: Maximum Interest Capitalized in 2002
Oceanwide Enterprises, Inc.
2002 interest accrued:
12% 5-year note ($2,000,000 x 12% )……………. $ 240,000
10% 10-year bonds ($8,000,000 x 10%)…………. 800,000
13% 3-year loan ($2,000,000 x 13%)……………. . 260,000
Total interest accrued—2002………………. $1,300,000
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Oceanwide Enterprises, Inc.Oceanwide Enterprises, Inc.
Oceanwide Enterprises, Inc.
Funds borrowed as general liabilities cannot be identified with any specific construction project.
It is also common that the interest rate varies between different loans and borrowings.
Therefore, a weighted-average interest rate must be computed for all general liabilities.
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Part 2: Weighted-Average Interest RatePart 2: Weighted-Average Interest Rate
Oceanwide Enterprises, Inc.
Weighted-average interest rate for the general liabilities for 2002:
Loan Amount Rate Interest Expense$2,000,000 x 12% = $ 240,000
8,000,000 x 10% = 800,000
$10,000,000 $1,040,000
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Part 2: Weighted-Average Interest RatePart 2: Weighted-Average Interest Rate
Oceanwide Enterprises, Inc.
Weighted-average interest rate for the general liabilities for 2002:
Loan Amount Rate Interest Expense$2,000,000 x 12% = $ 240,000
8,000,000 x 10% = 800,000
$10,000,000 $1,040,000
Weighted-average interest rate:
($1,040,000 $10,000,000) = 10.4%
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Part 2: Weighted-Average Interest RatePart 2: Weighted-Average Interest Rate
Oceanwide Enterprises, Inc.
Weighted-average interest rate for the general liabilities for 2002:
Loan Amount Rate Interest Expense$2,000,000 x 12% = $ 240,000
8,000,000 x 10% = 800,000
$10,000,000 $1,040,000
Weighted-average interest rate:
($1,040,000 $10,000,000) = 10.4%
This rate will be associated with any expenditures made on construction projects where the expenditures exceed any borrowings that are specific to a project.
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Oceanwide Enterprises, Inc.
Ship No. 340 was completed in October 2001. No construction costs were incurred on this project in 2002; therefore, there is no capitalized interest in 2002 for Ship No. 340.
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002 $1,150,000 10.4 6/12 $ 59,800
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002 1,200,000 10.4 9/12 93,600
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002 750,000 13.0 12/12 97,500
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002July 1, 2002
750,0001,250,000
13.013.0
12/126/12
97,50081,250
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002July 1, 2002
750,0001,250,000
950,000
13.013.010.4
12/126/126/12
97,50081,25049,400
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002July 1, 2002
750,0001,250,000
950,000
13.013.010.4
12/126/126/12
97,50081,25049,400
Ship #344:Sept. 1, 2002 810,000 10.4 4/12 28,080
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002July 1, 2002
750,0001,250,000
950,000
13.013.010.4
12/126/126/12
97,50081,25049,400
Ship #344:Sept. 1, 2002 810,000 10.4 4/12 28,080
Ship #345:Nov. 1, 2002 360,000 10.4 2/12 6,240
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Part 3: Interest to be Capitalized in 2002Part 3: Interest to be Capitalized in 2002
Expenditures AmountInterest
Capitalization Rate (%)
Fraction of the Year
Outstanding
Capitalized Interest
Ship #341:As of Jan. 1, 2002April 1, 2002
$1,150,0001,200,000
10.410.4
6/123/12
$ 59,80031,200
Ship #342:As of Jan. 1, 2002May 1, 2002
1,200,0001,600,000
10.410.4
9/125/12
93,60069,333
Ship #343:As of Jan. 1, 2002July 1, 2002
750,0001,250,000
950,000
13.013.010.4
12/126/126/12
97,50081,25049,400
Ship #344:Sept. 1, 2002 810,000 10.4 4/12 28,080
Ship #345:Nov. 1, 2002 360,000 10.4 2/12 6,240
Total capitalized interest for 2002 $516,403
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End of ProblemEnd of Problem
