Need help with AAE please!!***!Agh so fed up…***

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  • #2440620
    Asja
    Participant

    I thought that AAE needs to be caluculated only for the period that construction is being done…So if it begins and ends in one year, we calculate weighted or simple average of payments for AAE based on the period that construction is being done…This totally contradicts this question from AICPA:

    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?

    Solution:
    CORRECT! Interest is capitalized on the project’s average expenditures times the interest during that period. Key here is to use the 5% annual interest over the three months (April, May, and June).
    Average expenditures: 500,000+800,000+1,500,0003= 933,333
    Interest rate for 3-month period: .05 × 3/12 × .0125
    Capitalized interest: 11,666

    I don’t understand why 3 months is being used for AAE…I understand why 3 months is used for the interest because it asks for interest up until JUne 30th…oh ok at that point tHE AAE is outstanding only for 3 months, so I understand it now, and I had to write it out on here to get it..Since there is no way that I can delete this post, I am going to hit the submit button and go backto studying…Thanks, and SOORRY

    “The strongest of all warriors are these two — Time and Patience.” ― Leo Tolstoy (War and Peace)
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