07.07.2022 - 19:10

# Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified as a separate discrete job in the accounting records. At the end of 2007, Oceanwide correctly reported $5,400,000 as Construction in Progress on the f Question: Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified as a separate discrete job in the accounting records. At the end of 2007, Oceanwide correctly reported$5,400,000 as Construction in Progress on the following jobs.

 Ship Completion Date (end of month) Accumulated Costs (including 2007 interest) December 31, 2007 340 October 31, 2007* $2,300,000 341 June 30, 2008 1,150,000 342 September 30, 2008 1,200,000 343 January 31, 2009 750,000 Construction costs for 2008, and the dates the expenditures were made, were as follows:  Ship Date Costs 341 April 1, 2008$1,200,000 342 May 1, 2008 1,600,000 343 July 1, 2008 2,200,000 344 September 1, 2008 810,000 345 November 1, 2008 360,000

Ocean wide had the following general liabilities at December 31, 2008:

 12%, 5-year note (maturity date 2010) $2,000,000 10%, 10-year bonds (maturity date 2013) 8,000,000 On January 1, 2008, Oceanwide borrowed$2,000,000 specifically for the construction of ship 343. The loan was for three years with interest at 13%.

1. Compute the maximum interest that can be capitalized in 2008.

2. Compute the weighted-average interest rate for the general liabilities for 2008.

3. Compute the interest that Oceanwide should capitalize during 2008.

• 1. The maximum interest that can be capitalized in 2008 is calculated using the weighted-average accumulated expenditures and the weighted-average interest rate during the period. The weighted-average accumulated expenditures are calculated as follows: Weighted-average accumulated expenditures = [(Accumulated costs for ship 341 as of April 1, 2008 x 9/12) + (Accumulated costs for ship 342 as of May 1, 2008 x 8/12) + (Accumulated costs for ship 343 as of July 1, 2008 x 6/12) + (Accumulated costs for ship 344 as of September 1, 2008 x 4/12) + (Accumulated costs for ship 345 as of November 1, 2008 x 2/12)] = [(1,150,000 x 9/12) + (1,200,000 x 8/12) + (2,200,000 x 6/12) + (810,000 x 4/12) + (360,000 x 2/12)] = $3,008,333 The weighted-average interest rate during the period is the rate on the specific loan taken out for the construction of ship 343, which is 13%. Therefore, the maximum interest that can be capitalized in 2008 is calculated as: Maximum capitalized interest = Weighted-average accumulated expenditures x Weighted-average interest rate =$3,008,333 x 13% = $390,083 2. The weighted-average interest rate for the general liabilities for 2008 is calculated as follows: Weighted-average interest rate = [(12% x$2,000,000) + (10% x $8,000,000)] / ($2,000,000 + $8,000,000) = 10.4% 3. The interest that Oceanwide should capitalize during 2008 is the lesser of the actual interest incurred on the specific loan taken out for the construction of ship 343 and the maximum interest that can be capitalized in 2008. The actual interest incurred on the loan is calculated as: Actual interest incurred = Loan amount x Interest rate x Time =$2,000,000 x 13% x 1 = $260,000 Therefore, the interest that Oceanwide should capitalize during 2008 is$260,000, since this is the lesser of the actual interest incurred and the maximum interest that can be capitalized.