Reference no: EM132601370
Question - Kermit Inc. contracted with a construction company to construct an office building. Construction began on January 1, 2020 and was completed by December 31, 2020. Expenditures for the construction were $3,000,000 on January 31, $3,000,000 on March 1, $4,000,000 on April 30, $4,000,000 on June 30, $4,500,000 on September 1, and $1,000,000 on December 31. To finance the construction, Kermit Inc. borrowed $6,000,000 on a 10%, 3-year note. In addition, the company has outstanding all-year a $4,000,000, 8% note payable, and a $3,000,000, 9%, note payable. All interest payments are due at the end of the year.
Instructions -
(1) Compute the avoidable interest for interest capitalization purposes.
(2) Compute the actual interest for interest capitalization purposes.
(3) Determine whether the company should capitalize avoidable interest or actual interest for interest capitalization purposes.
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