Agasse Industries began construction of a new facility and took out a $1,500,000, 12% construction loan on April 1, 2024. Agasse made payments to the general contractor of $364,000 on April 1, $864,000 on August 31, and $464,000 on December 31.
Required:
Compute the amount of interest that Agasse would capitalize in 2024.
To determine the amount of interest that Agasse would capitalize in 2024, we need to calculate the weighted average accumulated expenditures (WAAE) during the period.
WAAE = [(Expenditure1 x Time1) + (Expenditure2 x Time2) + ... + (ExpenditureN x TimeN)] / Total Time
Expenditure1 = $364,000
Time1 = 9 months (April 1 to December 31)
Expenditure2 = $864,000
Time2 = 4 months (August 31 to December 31)
Expenditure3 = $464,000
Time3 = 0 months (December 31 to December 31)
Total Time = Time1 + Time2 + Time3 = 9 months + 4 months + 0 months = 13 months
WAAE = [(364,000 x 9) + (864,000 x 4) + (464,000 x 0)] / 13
WAAE = (3,276,000 + 3,456,000) / 13
WAAE = 6,732,000 / 13
WAAE = $517,846.15
Next, we calculate the interest expense by multiplying the average accumulated expenditures by the interest rate and time.
Interest Expense = WAAE x Interest Rate x Time
Interest Rate = 12% per year
Time = 13 months / 12 months per year = 1.0833 years
Interest Expense = $517,846.15 x 0.12 x 1.0833
Interest Expense = $67,431.80
Therefore, Agasse would capitalize an amount of $67,431.80 as interest in 2024.