Question: The following two companies constructed a building with a total construction cost of $20 million (costs were incurred evenly over the course of a year). Each company chose to finance the construction differently.
Company A Company B
Weighted average accumulated expenditures 10,000,000 10,000,000
Total construction cost of building
(excluding interest) 20,000,000 20,000,000
Company financing (outstanding at year end)
Construction loan (14%) 20,000,000 0
Common stock 0 20,000,000
Total construction loan interest 1,400,000 0
Instructions
Q1. Calculate the total cost for each building
Q2. Explain the discrepancy in the way cost was determined
Q3. Propose a change in the accounting standards that could eliminate this discrepancy.