10 14 interest capitalization hokie can use the

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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
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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 (R&D) 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 Long-term assets purchased for R&D purposes 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 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 Long-term assets purchased for R&D purposes 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
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10-17 End of Chapter 10 – Part 2
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