[Kairos]

Can anyone help me with deriving the answer? I’ve been at this for quite some time now and can’t figure it out.

The answer is A but i’m having trouble figuring out the the calculations.

6. A company with a June 30 fiscal year end entered into a $3,000,000 construction project on April 1 to be completed on September 30. The cumulative construction-in-progress balances at April 30, May 31, and June 30 were $500,000, $800,000, and $1,500,000, respectively. The interest rate on company debt used to finance the construction project was 5% from April 1 through June 30 and 6% from July 1 through September 30. Assuming that the asset is placed into service on October 1, what amount of interest should be capitalized to the project on June 30?

$11,666

$18,750

$75,000

$90,000

Thanks!!

[clrk217john]

Capitalized interest is the lesser of actual or avoidable interest.

To find avoidable interest, take the weighted average of expenditures for the year.

$500K spent in April – 3 months (April, May, June)
$300K spent in May ($800 – 500) – 2 months
$700K spent in June ($1500 – 800) – 1 Month

Thus, 500(3/12) + 300(2/12) + 700(1/12) = $233,333

Then, taking this expenditure and multiplying by the 5% interest rate gives $11,666, the answer.

Company has a June 30 year end and the question only asks for that; info after June 30 is irrelevant.

FAR - 95, 2/17/2016
AUD - 98, 4/2/2016
REG - 92, 6/10/2016
BEC - Waiting for Score, 7/9/2016

[Kairos]

thank you so much for the explanation! you are awesome!!!

[thebigguy1992]

to find the actual interest in this problem would you just do 3,000,000 *.05?

BEC - 79
FAR - 62,73,76
AUD - 70, 88
REG - 83

[Anonymous]

thebigguy1992,

No, you take the W/A expense * %

Thus, 500(3/12) + 300(2/12) + 700(1/12) = $233,333

233,333 * 5% = 11,666

[thebigguy1992]

the answer explanation from the second post said that was the avoidable interest not the actual interest

BEC - 79
FAR - 62,73,76
AUD - 70, 88
REG - 83

[Anonymous]

thebigguy1992,

Yes, you are correct. My bad, I did not see you are asking for the actual interest.

[Anonymous]

Becker recently posted the 2016 AICPA Newly Released Questions with comprehensive explanations. For BEC, there are 40 MCQs and 2 WC Questions/SIMs.

One of the SIMs pertains to “FORMAL BUDGET” (See attached file).
https://imgur.com/BBa0dxY

View post on imgur.com

It's nowhere found in any of the Becker's six chapters. How does a formal budget relate to a master budget and flexible budget?

If I were to get this question, I’d probably be able to recall the two types of budgets, such as operating budgets and financial budgets. I’d probably list down the advantages and disadvantages of both authoritative and participative standard budgets.

[Author]

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