Interest During Construction
Response to the following problem:
The Alta Company is constructing a production complex that qualifies for interest capitalization. The following information is available:
Capitalization period: January 1, 2010 to June 30, 2012
Expenditures on project (incurred evenly during each period and excluding capitalized interest from previous years):
2010 $2,000,000
2011 $3,760,000
2012 $4,324,000
Amounts borrowed and outstanding:
$3 million borrowed at 12%, specifically for the project
$6 million borrowed on July 1, 2006, at 14%
$14 million borrowed on January 1, 2002, at 8%
Required
1. Compute the amount of interest costs capitalized each year.
2. If it is assumed that the production complex has an estimated life of 20 years and a residual value of zero, compute the straight-line depreciation in 2013.
3. Explain the effects of the interest capitalization on the financial statements for all three years. Ignore income taxes.