Home / Questions / Capitalization of Interest Lodi Department Stores Inc constructs its own stores. In the p...
Capitalization of Interest
Lodi Department Stores, Inc., constructs its own stores. In the past, no cost has been added to the asset value for interest on funds borrowed for construction. Management has decided to correct its policy and desires to include interest as part of the cost of a new store just being completed. Based on the following information, how much interest would be added to the cost of the store (1) in 2008 and (2) in 2009?
Total construction expenditures:
|
January 2, 2008 |
$ 600,000 |
|
May 1, 2008 |
600,000 |
|
November 1, 2008 |
500,000 |
|
March 1, 2009 |
700,000 |
|
September 1, 2009 |
400,000 |
|
December 31, 2009 |
500,000 |
|
|
$3,300,000 |
Outstanding company debt:
|
Mortgage related directly to new store; interest rate, 12%; term, |
|
|
5 years from beginning of construction |
$1,000,000 |
|
General bond liability: |
|
|
Bonds issued just prior to construction of store; interest rate, |
|
|
10% for 10 years |
$ 500,000 |
|
Bonds issued prior to construction; interest rate, |
|
|
8%, mature in 5 years |
$1,000,000 |
|
Estimated cost of equity capital |
14% |
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