{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Hokie may either use the weighted average interest

Info iconThis preview shows pages 9–13. Sign up to view the full content.

View Full Document Right Arrow Icon
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? Hokie may either use the weighted-average interest rate on all of its debt or it may use the specific interest method.
Background image of page 9

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

View Full Document Right Arrow Icon
10-10 Interest Capitalization What would Hokie do if it used the specific interest method and specific new borrowing was insufficient to cover the average accumulated expenditures? What would Hokie do if it used the specific interest method and specific new borrowing was insufficient to cover the average accumulated expenditures? Assume that Hokie borrowed $250,000 on May 1 for 10 years at a 10% interest rate specifically to finance construction. Hokie also has two other 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. Assume that Hokie borrowed $250,000 on May 1 for 10 years at a 10% interest rate specifically to finance construction. Hokie also has two other 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.
Background image of page 10
10-11 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 would be calculated as follows: $250,000 × 10% × 8/12 = $16,667 ($337,500 – $250,000) × 12% × 8/12 = $7,000 Total capitalized interest = $16,667 + $7,000 = $23,667* *Must not exceed actual interest incurred.
Background image of page 11

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

View Full Document Right Arrow Icon
10-12 Interest Capitalization What if Hokie did not complete construction of the building on December 31? Assume that construction continues for another 5 months and the building is completed on May 31 st of the second year. As in the previous example, assume that Hokie borrowed $250,000 on May 1 (year 1) for 10 years at a 10% interest rate specifically to finance construction. Hokie also has two other 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.
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page9 / 17

Hokie may either use the weighted average interest rate on...

This preview shows document pages 9 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online