Calling on all FAR experts!! I am struggling with a question in the Becker software, related to the interest capitalization topic. Please Help!!
CPA2013-05105
On January 1, Year 3, Starlight Construction Co. Began a construction project qualifying for capitalization of interest. The total amount spent on this project during year 3 was $250,000, spent uniformly during the year. To help pay for construction, $200,000 was borrowed at 10% on January 1, Year 3, and funds were not needed for construction were temporarily invested in short term securities, yielding $3,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $150,000, 10year, 7% note payable dated January 1, Year 1. How much interest should be capitalized by Starlight during Year 3?
A. 25,000
B. 22,000
C. 12,500
D. 9,500
Why does the solution require us to divide the total expenditures by 2? The explanation states that "average accumulated expenditures" must be divided by 2 to arrive at "average accumulated expenditures", since expenditures were incurred evenly during the year.
Does this makes sense to anybody? I do not see the logic in this, maybe it is time to go to bed.
Thanks!!!