Ch10 Part2

# Interest aae specific borrowing rate time interest

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Interest = AAE × Specific Borrowing Rate × Time Interest = \$337,500 × 10% × 8/12 = \$22,500 Interest Capitalization Note : The amount of interest capitalized cannot exceed the actual amount of interest incurred. Since the actual amount of interest incurred equals \$66,667*, the entire \$22,500 can be capitalized. (*\$1,000,000 x 10% x 8/12 = 66,667) Note : The amount of interest capitalized cannot exceed the actual amount of interest incurred. Since the actual amount of interest incurred equals \$66,667*, the entire \$22,500 can be capitalized. (*\$1,000,000 x 10% x 8/12 = 66,667)

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10-7 If Hokie had not borrowed specifically for this construction project and it had other debt outstanding, it would have used the weighted-average interest method . Assume that Hokie has two long-term notes outstanding that are not related to the construction project. The principal of these notes is \$500,000 and \$300,000 with interest rates of 13.2% and 10%, respectively. Both notes were outstanding during the entire construction period. If Hokie had not borrowed specifically for this construction project and it had other debt outstanding, it would have used the weighted-average interest method . Assume that Hokie has two long-term notes outstanding that are not related to the construction project. The principal of these notes is \$500,000 and \$300,000 with interest rates of 13.2% and 10%, respectively. Both notes were outstanding during the entire construction period. Interest Capitalization
10-8 Interest Capitalization Interest Actual Debt Rate Interest General Debt 500,000 13.2% 66,000 300,000 10.0% 30,000 800,000 \$ 96,000 \$ Calculation of the weighted-average interest rate on general debt: Calculation of the weighted-average interest rate on general debt: \$96,000 \$800,000 = 12% The amount of interest capitalized would be: Interest = AAE × Weighted-average Rate × Time Interest = \$337,500 × 12% × 8/12 = \$27,000* The amount of interest capitalized would be: Interest = AAE × Weighted-average Rate × Time Interest = \$337,500 × 12% × 8/12 = \$27,000* *Does not exceed actual interest incurred. Calculation of actual interest incurred: \$500,000 x 13.2% x 8/12 = \$44,000 \$300,000 x 10.0% x 8/12 = \$20,000 *Does not exceed actual interest incurred. Calculation of actual interest incurred: \$500,000 x 13.2% x 8/12 = \$44,000 \$300,000 x 10.0% x 8/12 = \$20,000 \$64,000

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10-9 Interest Capitalization What interest rate would Hokie, Inc. use to calculate the amount of interest to capitalize if Hokie borrowed specifically to finance construction and also had other debt outstanding? Hokie may either use the weighted-average interest rate on all of its debt or it may use the specific interest method. What interest rate would Hokie, Inc. use to calculate the amount of interest to capitalize if Hokie borrowed specifically to finance construction and also had other debt outstanding?
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