Interest aae specific borrowing rate time interest

Info icon This preview shows pages 6–10. Sign up to view the full content.

View Full Document Right Arrow Icon
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)
Image of page 6

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 7
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
Image of page 8

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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?
Image of page 9
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern