On Jan 1, 2007, R Inc signed a fixed-price contract to have B Assoc construct a major plant facility at cost $4,000,000. Estimated 3 yrs to complete the project. Same date, to finance the project, R Inc borrowed $4,000,000 payable in 10 annual installments of $400,000 plus interest rate of 11%. During 2007, R Inc made a deposit and progress pymts of $1,500,000 under the contract. The average accumulated expenditures was $650,000 per yr. The excess borrowed funds were invested in short-term securities and realized income of $250,000. What amount should R Inc report as capitalized interest at 12/31/07?

Ans: $71,500.

Comment: I am so lost. Please help. Thanks.

you can only capitalize intrest to the extent of the amount that the funds were expended on the project...

Thus only 650,000 were spent on the project and 650000*.11 = 71,500