At the beginning of 2018 Heinz Corp started construction on

At the beginning of 2018, Heinz Corp. started construction on a new office building. Construction expenditures during 2018 were as follows:

January 1                     $400,000

May 1                          150,000

July 1                         300,000  

December 31               100,000   

Heinz has the following debts outstanding during 2018; the bonds payable is directly related to the construction projects; none of the others are related to the construction project.

Liability

Annual Percent

Loan Amount

Notes Payable

4%

$200,000

Bonds Payable

6%

$400,000

Mortgage Payable

5%

$300,000

Liability	Annual Percent	Loan Amount
Notes Payable	4%	$200,000
Bonds Payable	6%	$400,000
Mortgage Payable	5%	$300,000

Solution

Actual interest expenditure incurred: Principal Interest % Interest expenditure 1 2 1*2 6 % Bonds payable-Specific loan for construction 400000 6% 24000 4% note-General purpose 200000 4% 8000 5% Mortgage payable-General purpose 300000 5% 15000 47000 Avoidable interest=Weighted average accumulated expenditure*interest rate Weighted average accumulated expenditure: Date Expense Capitalization period Weight Weighted expenditure A B C=B/12 A*C 1-Jan 400000 12 months 1.00 400000 1-May 150000 8 months 0.67 100000 1-Jul 300000 6 months 0.50 150000 31-Dec 100000 0 months 0.00 0 650000 Weighted average interest rate for general purpose notes: Principal Interest % Interest expenditure 4% note-General purpose 200000 4% 8000 5% Mortgage payable-General purpose 300000 5% 15000 500000 23000 Weighted average interest rate=23000/500000=4.60% Avoidable interest: Principal Interest % Interest expenditure Specific note 400000 6% 24000 General note 250000 4.60% 11500 (650000-400000) 35500 Interest to be capitalized=Lower of actual interest or avoidable interest=Lower of 47000 or 35500=35500 Hence interest to be charged to expense=Actual interest-Interest capitalized=47000-35500=11500