In: Accounting
On January 1, 2018, the Mason Manufacturing Company began
construction of a building to be used as its office headquarters.
The building was completed on September 30, 2019.
Expenditures on the project were as follows:
January 1, 2018 | $ | 1,500,000 | |
March 1, 2018 | 1,200,000 | ||
June 30, 2018 | 1,400,000 | ||
October 1, 2018 | 1,200,000 | ||
January 31, 2019 | 360,000 | ||
April 30, 2019 | 693,000 | ||
August 31, 2019 | 990,000 | ||
On January 1, 2018, the company obtained a $4,000,000 construction
loan with a 14% interest rate. The loan was outstanding all of 2018
and 2019. The company’s other interest-bearing debt included two
long-term notes of $1,000,000 and $4,000,000 with interest rates of
10% and 12%, respectively. Both notes were outstanding during all
of 2018 and 2019. Interest is paid annually on all debt. The
company’s fiscal year-end is December 31.
Required:
1. Calculate the amount of interest that Mason
should capitalize in 2018 and 2019 using the specific interest
method.
3. Calculate the amount of interest expense that
will appear in the 2018 and 2019 income statements.
Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the specific interest method and interest expense that will appear in the 2018 and 2019 income statements. (Enter your answers in dollars.)
|
2.
What is the total cost of the building? (Enter your answer in dollars.)
2018 | 2019 | |||||
Interest Capitalized | $ 4,90,000 | $ 6,46,635 | ||||
Interest Expense | $ 6,50,000 | $ 4,93,365 | ||||
Cost of Building | = | $ 84,79,635 | ||||
Workings: | ||||||
Expenditure for 2018 | ||||||
Jan 1,2018 | $ 15,00,000 | X | 12/12 | = | $ 15,00,000 | |
March 1, 2018 | $ 12,00,000 | X | 10/12 | = | $ 10,00,000 | |
June 30, 2018 | $ 14,00,000 | X | 6/12 | = | $ 7,00,000 | |
October 1, 2018 | $ 12,00,000 | X | 3/12 | = | $ 3,00,000 | |
$ 53,00,000 | $ 35,00,000 | |||||
Interest Capitalized in 2018 | ||||||
$ 35,00,000 | X | 14.00% | = | $ 4,90,000 | ||
Expenditure for 2019 | ||||||
Jan 1, 2019 ($5300,000+$490,000) | $ 57,90,000 | X | 9/9 | = | $ 57,90,000 | |
Jan 31, 2019 | $ 3,60,000 | X | 8/9 | = | $ 3,20,000 | |
April 30, 2019 | $ 6,93,000 | X | 5/9 | = | $ 3,85,000 | |
August 31. 2019 | $ 9,90,000 | X | 1/9 | = | $ 1,10,000 | |
$ 78,33,000 | $ 66,05,000 | |||||
Interest Capitalized in 2019 | ||||||
$ 66,05,000 | ||||||
Less: | $ 40,00,000 | X | 14.00% | X 9/12 | = | $ 4,20,000 |
$ 26,05,000 | X | 11.60% | X 9/12 | = | $ 2,26,635 | |
Interest Capitalized in 2019 | = | $ 6,46,635 | ||||
Weighted Average rate of all debt:- | ||||||
$ 10,00,000 | X | 10% | = | $ 1,00,000 | ||
$ 40,00,000 | X | 12% | = | $ 4,80,000 | ||
$ 50,00,000 | $ 5,80,000 | |||||
Weighted Average rate of all debt = | 11.60% | |||||
($580,000 / $50,00,000) | ||||||
Interest Expense for 2018: | ||||||
Total Interest Incurred | ($4000000*14%)+($1000000*10%)+($4000000*12%) | = | $ 11,40,000 | |||
Less : Interest Capitalized | = | $ 4,90,000 | ||||
2018 Expense | = | $ 6,50,000 | ||||
Interest Expense for 2019: | ||||||
Total Interest Incurred | = | $ 11,40,000 | ||||
Less : Interest Capitalized | = | $ 6,46,635 | ||||
2019 Expense | = | $ 4,93,365 | ||||
Cost of Building | ||||||
Expenditure for 2018 | = | $ 53,00,000 | ||||
Interest Capitalized in 2018 | = | $ 4,90,000 | ||||
Expenditure for 2019 | = | $ 20,43,000 | ||||
Interest Capitalized in 2019 | = | $ 6,46,635 | ||||
Cost of Building | = | $ 84,79,635 |