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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

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%

Jun 17 2020 View more View Less

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