Choice "A" is correct. Total interest incurred equals the interest on the specific construction debt ($50,000) plus interest on other borrowing ($20,000) for a total of $70,000. Avoidable interest equals the interest on the weighted-average amount of accumulated expenditures ($40,000). Capitalized interest equals the smaller of the total interest incurred or the avoidable interest. Thus, capitalized interest equals $40,000. SFAS 34 para. 12-15
Choice "b" is incorrect. Interest on other borrowing is capitalized only if total interest incurred is less than avoidable interest. SFAS 34 para. 15
Choice "d" is incorrect. Although interest on specific construction debt equals $50,000, only avoidable interest can be capitalized. SFAS 34 para. 12
Choice "c" is incorrect. Total interest incurred will be capitalized if it is less than the avoidable interest. SFAS 34 para. 15