The following two companies constructed a building with a total construction cost of $20 million (costs were incurred evenly over the course of a year). Each company chose to finance the construction differently.
Company A Company B
Weighted average accumulated expenditures 10,000,000 10,000,000
Total construction cost of building
(excluding interest) 20,000,000 20,000,000
Company financing (outstanding at year end)
Construction loan (14%) 20,000,000 0
Common stock 0 20,000,000
Total construction loan interest 1,400,000 0
a. Calculate the total cost for each building
b. Explain the discrepancy in the way cost was determined
c. Propose a change in the accounting standards that could eliminate this discrepancy.
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a. Calculate the total cost for each building Company A Company B
Total cost ...
The solution compares the cost of buildings and explains the discrepancy.