Laserwords Inc. is a book distributor that had been operating in its original facility since 1985. The increase in certification programs and continuing education requirements in several professions have contributed to an annual growth rate of 15% for Laserwords since 2010. Laser- words’ original facility became obsolete by early 2015 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.
On June 1, 2015, Laserwords contracted with Black Construction to have a new building constructed for 4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.
July 30, 2015 900,000
January 30, 2016 1,500,000
May 30, 2016 1,600,000
Total payments 4,000,000
Construction was completed, and the building was ready for occupancy on May 27, 2016. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2016, the end of its fiscal year.
10%, 5-year note payable of 2,000,000, dated April 1, 2012, with interest payable annually on April 1.
12%, 10-year bond issue of 3,000,000 sold at par on June 30, 2008, with interest payable annually on June 30.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.
(a) Compute the weighted-average accumulated expenditures on Laserwords’ new building during the capitalization period.
(b) Compute the avoidable interest on Laserwords’ new building.
(c) Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2016.
(1) Identify the items relating to interest costs that must be disclosed in Laserwords’ financial statements.
(2) Compute the amount of each of the items that must be disclosed.