# 10 13 interest capitalization hokie incurred the

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10-13 Interest Capitalization Hokie incurred the following qualifying expenditures in year 2: March 1, \$100,000 and May 1, \$200,000. Average Accumulated Expenditures Fraction of Construction Date Expenditure Period AAE 1/1 808,667 \$ 5/5 808,667 \$ 3/1 100,000 3/5 60,000 5/1 200,000 1/5 40,000 1,108,667 \$ 908,667 \$ * Represents the total cost of the building as of December 31, year 1. Calculated by adding the total construction expenditures incurred in year 1 (\$785,000 – from slide 5) plus the interest capitalized in year 1 (\$23,667 from slide 11). *

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10-14 Interest Capitalization Hokie can use the specific borrowing rate of 10 percent on average accumulated expenditures up to \$250,000. Hokie must use the weighted-average interest rate on average accumulated expenditures that exceed \$250,000. The amount of interest capitalized in year 2 would be calculated as follows: \$250,000 × 10% × 5/12 = \$10,416 (\$908,667 – \$250,000) × 12% × 5/12 = \$32,933 Total capitalized interest = \$10,416 + \$32,933 = \$43,349
10-15 Interest Capitalization The total cost of the building is the sum of all expenditures incurred plus all interest capitalized. Year 1 Expenditures 785,000 \$ Year 1 Capitalized Interest 23,667 Year 2 Expenditures 300,000 Year 2 Capitalized Interest 43,349 1,152,016 \$ Total Cost of Building

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10-16 Research and Development Costs Occur prior to start of commercial production Examples: investigation aimed at discovery of new knowledge, design, construction and testing of prototypes Are expensed as incurred Exception: Software development costs incurred after technical feasibility is established are capitalized Expensed in period incurred unless they have alternative future uses If long-term assets have alternative future uses, the Research and Development Costs Occur prior to start of commercial production Examples: investigation aimed at discovery of new knowledge, design, construction and testing of prototypes Are expensed as incurred Exception: Software development costs incurred after technical feasibility is established are capitalized Expensed in period incurred unless they have alternative future uses If long-term assets have alternative future uses, the depreciation is included in R&D expense
10-17 End of Chapter 10 – Part 2
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10 13 Interest Capitalization Hokie incurred the following...

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