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Capitalization of Interest

Chapter 12. Illustrated Solution: Problem 12-45. Capitalization of Interest. Problem Background. Oceanwide Enterprises, Inc. If a company self-constructs long-lived assets, they may be entitled to capitalize some interest costs as part of the overall cost of the asset.

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Capitalization of Interest

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  1. Chapter 12 Illustrated Solution: Problem 12-45 Capitalization of Interest

  2. Problem Background Oceanwide Enterprises, Inc. If a company self-constructs long-lived assets, they may be entitled to capitalize some interest costs as part of the overall cost of the asset. One of the restrictions is that a company may never capitalize more interest costs than they actually incur (in any fiscal year).

  3. Part 1: Maximum Interest Capitalized in 2002 Oceanwide Enterprises, Inc. 2002 interest accrued: 12% 5-year note ($2,000,000 x 12% )……………. $ 240,000 10% 10-year bonds ($8,000,000 x 10%) …………. 800,000

  4. Part 1: Maximum Interest Capitalized in 2002 Oceanwide Enterprises, Inc. 2002 interest accrued: 12% 5-year note ($2,000,000 x 12% )……………. $ 240,000 10% 10-year bonds ($8,000,000 x 10%) …………. 800,000 13% 3-year loan ($2,000,000 x 13%)……………. . 260,000 Total interest accrued—2002 ………………. $1,300,000

  5. Oceanwide Enterprises, Inc. Oceanwide Enterprises, Inc. Funds borrowed as general liabilities cannot be identified with any specific construction project. It is also common that the interest rate varies between different loans and borrowings. Therefore, a weighted-average interest rate must be computed for all general liabilities.

  6. Part 2: Weighted-Average Interest Rate Oceanwide Enterprises, Inc. Weighted-average interest rate for the general liabilities for 2002:

  7. Part 2: Weighted-Average Interest Rate Oceanwide Enterprises, Inc. Weighted-average interest rate for the general liabilities for 2002: Weighted-average interest rate: ($1,040,000  $10,000,000) = 10.4%

  8. Part 2: Weighted-Average Interest Rate Oceanwide Enterprises, Inc. Weighted-average interest rate for the general liabilities for 2002: Weighted-average interest rate: ($1,040,000  $10,000,000) = 10.4% This rate will be associated with any expenditures made on construction projects where the expenditures exceed any borrowings that are specific to a project.

  9. Part 3: Interest to be Capitalized in 2002 Oceanwide Enterprises, Inc. Ship No. 340 was completed in October 2001. No construction costs were incurred on this project in 2002; therefore, there is no capitalized interest in 2002 for Ship No. 340.

  10. Part 3: Interest to be Capitalized in 2002

  11. Part 3: Interest to be Capitalized in 2002

  12. Part 3: Interest to be Capitalized in 2002

  13. Part 3: Interest to be Capitalized in 2002

  14. Part 3: Interest to be Capitalized in 2002

  15. Part 3: Interest to be Capitalized in 2002

  16. Part 3: Interest to be Capitalized in 2002

  17. Part 3: Interest to be Capitalized in 2002

  18. Part 3: Interest to be Capitalized in 2002

  19. Part 3: Interest to be Capitalized in 2002

  20. End of Problem

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