Ch10 Part2

# Hokie may either use the weighted average interest

This preview shows pages 9–14. Sign up to view the full content.

Hokie may either use the weighted-average interest rate on all of its debt or it may use the specific interest method.

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

View Full Document
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.
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.

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

View Full Document
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.
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).

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern
{"found_math": false, "script_math_tex": 0, "script_math_asciimath": 0, "math_annotations": 0, "math_alttext": 0, "mathml": 0, "mathjax_tag": 0, "mathjax_inline_tex": 0, "mathjax_display_tex": 0, "mathjax_asciimath": 0, "img_math": 0, "codecogs_latex": 0, "wp_latex": 0, "mimetex.cgi": 0, "/images/math/codecogs": 0, "mathtex.cgi": 0, "katex": 0, "math-container": 0, "wp-katex-eq": 0, "align": 0, "equation": 0, "x-ck12": 0, "texerror": 0, "url": "https://www.coursehero.com/file/p5i8e/Hokie-may-either-use-the-weighted-average-interest-rate-on-all-of-its-debt-or/", "fetch_time": 1542281211000000000, "content_mime_type": "text/html", "warc_filename": "crawl-data/CC-MAIN-2018-47/segments/1542039742666.36/warc/CC-MAIN-20181115095814-20181115121814-00479.warc.gz", "warc_record_offset": 838655768, "warc_record_length": 97376, "token_count": 1017, "char_count": 4447, "score": 3.546875, "int_score": 4, "crawl": "CC-MAIN-2018-47", "snapshot_type": "latest", "language": "en", "language_score": 0.9510499835014343, "file_path": "/sailhome/yjruan/project/latent-lm/data/processed/finemath-4plus/finemath-4plus/train-00003-of-00064.parquet"}