Ayayai Inc is a book distributor that had been operating in

Ayayai Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Ayayai since 2012. Ayayai’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Ayayai now carries CDs in addition to books.

On June 1, 2017, Ayayai contracted with Black Construction to have a new building constructed for $4,320,000 on land owned by Ayayai. The payments made by Ayayai to Black Construction are shown in the schedule below.

Date

Amount

$972,000

1,620,000

1,728,000

$4,320,000

Construction was completed and the building was ready for occupancy on May 27, 2018. Ayayai had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year.

The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.

Compute the weighted-average accumulated expenditures on Ayayai’s new building during the capitalization period.

Weighted-Average Accumulated Expenditures

Compute the avoidable interest on Ayayai’s new building. (Round intermediate percentage calculation to 1 decimal place, e.g. 15.6% and final answer to 0 decimal places, e.g. 5,125.)

Avoidable Interest

Some interest cost of Ayayai Inc. is capitalized for the year ended May 31, 2018. Compute the amount of each items that must be disclosed in Ayayai’s financial statements.

Solution

Calculation of Weighted average rate of interest

Note - Calculation of wieghted average amount of accumulated expenditure

$810000

($972000*10/12)

$540000

($1620000*4/12)

Weighted Average expenses = ($810000+$540000)=$1350000

1. SPECIFIC BORROWING RATE

Specific borrowing = There are no specific borrowing

2. GENERAL BORROWING RATE

Weighted average Rate

(Total general interest/Total loan)*100

$216000

(10% * $2160000)

$388800

(12% * $3240000)

$604800

($216000 + $388800)

$5400000

($2160000 + $3240000)

Weighted average accumulated expenditure = $1350000

($1350000 * 11.2%)

$151200

Calculation of Actual Interest

Analysis

Since potential/avoidable Interest is less than actual Interest

Hence avoidable Interest (to be capitalised) = $151200