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On January 1, 2021, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The only interest-bearing debt the company had outstanding during 2021 was long-term bonds with a book value of $10,000,000 and an effective interest rate of 8%. Construction expenditures incurred during 2021 were as follows:January 1$500,000March 1600,000July 31480,000September 30600,000December 31300,000Required:Calculate the amount of interest capitalized for 2021.

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Answer:

The amount of interest capitalized for 2021 is $ 112,000.

If the question clarity is as in the explanation below.

Explanation:

Let us assume January 1$500,000 means January 1 expenditure is $500,000

and March 1600,000 means March 1 expenditure is $ 600,000

and July 31480,000 means July 31 expenditure is $ 480,000

and September 30600,000 means Sept. 30 expenditure is $ 600,000

and December 31300,000 means Dec. 31 expenditure is $ 300,000

then to get the cost to be capitalised follow IAS 23 borrowing cost principle for single funding with periodic drawdown;

January1 drew down                                                  $500,000

borrowing cost (8%x500,000x12/12)= $40,000

March 1  drew down                                                    $600,000

borrowing cost (8%x600,000X11/12)= $44,000

July 31  drew down                                                      $480,000

borrowing cost (8%x480,000X5/12)= $16,000

Sept 30  drew down                                                    $600,000

borrowing cost (8%x600,000X3/12)= $12,000

Dec1  drew down                                                          $300,000

borrowing cost (8%x300,000X0/12)= $0

Total interest to capitalise in 2021 =   $112,000

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