1. Gabriela H. Schneider, CMA; Grant MacEwan College
INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College 2

2. Interest Capitalization
C H A P T E R 11
Appendix 11A
Illustration of
Interest Capitalization

3. Learning Objectives
Calculate the amount of capitalizable interest on projects involving expenditures over a period of time and borrowings from different sources at varying rates.

4. Shalla Corporation: Example
Given:
November 1, 2001 contracts with Pfeifer Construction Co. Ltd. to construct a $1.4 million building (on land costing $100,000)
First payment made by Shalla to Pfeifer includes the payment for the land
Payments made in 2002:
January 1 $ 210,000 December 31 $ 450,000
March 1 $ 300,000 Total $1,500,000
May 1 $ 540,000
Building completed December 31, 2002

5. Shalla Corporation: Example
Debt outstanding at December 31, 2002
Specific Construction Debt: $750,000 15%, three-year note
Other Debt: 10%, five-year note $550,000 12%, ten-year bonds $600,000

6. Shalla Corporation: Example
Weighted-Average Accumulated Expenditures:
Jan. 1 $ 210, /12 = $210,000
Mar , /12 = 250,000
May , /12 = 360,000
Dec , /12 =
WAAE $820,000
Note: The land payment is included in the WAAE.
Next step: avoidable interest and appropriate
interest rate calculation

7. Shalla Corporation: Example
Weighted-Average Interest Rate =
Total Interest  Total Principal
Do not include Construction Specific Debt
$127,000*  ($550,000 + $600,000) = 11.04%
* (550,000 X .10) + (600,000 X .12)
The rates of interest for the avoidable interest
Calculation are then:
Construction Note: 15%
All Other Amounts: 11.04%

8. Shalla Corporation: Example
Avoidable Interest:
WAAE up to Construction Specific Debt X Rate +
Any residual amount of WAAE X Rate
Avoidable Interest:
$750,000 X 15% = $112,500
70,000 X 11.04% = ,728
$820, $120,228
This amount is then compared to the actual
interest paid.

9. Shalla Corporation: Example
Actual Interest:
$750,000 X 15% = $112,500
550,000 X 10% = ,000
600,000 X 12% = ,000
Total Actual Interest Paid $239,500
Avoidable Interest = $120,228
Actual Interest = $239,500
The lesser of these two amounts is capitalized
Entry:
Dr. Building 120,228
Cr. Interest Expense 120,228

10. COPYRIGHT
Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.