Interest During Construction
Response to the following problem:
The Snowbird Company is constructing a building that qualifies for interest capitalization. It is built between January 1 and December 31, 2010. Expenditures, which occur evenly throughout the year, totaled $800,000. The company borrowed $500,000 at 12% to help finance the project. In addition, the Snowbird Company had outstanding borrowings of $2 million at 8%.
Required
1. Compute the amount of interest capitalized on the building.
2. What effect does the interest capitalization have on the company's financial statements after it completes the building?