Question

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	$	1,850,000
March 1, 2018		1,500,000
June 30, 2018		1,700,000
October 1, 2018		1,500,000
January 31, 2019		405,000
April 30, 2019		738,000
August 31, 2019		1,035,000
On January 1, 2018, the company obtained a $4,500,000 construction loan with a 12% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $6,000,000 and $9,000,000 with interest rates of 8% and 10%, 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. 2. What is the total cost of the building? 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.) 2018 2019 Interest capitalized Interest expense What is the total cost of the building? (Enter your answer in dollars.) Total cost of building

Answer 1

1)     AVG expenses
01-Jan	1850000	12 month	1910000
01-Mar	1500000	10 month	1250000
30-Jun	1700000	6 month	850000
01-Oct	1500000	3 month	375000
	6550000		4385000
interest capitalised = 4385000*12% = 526200
average expenses for 2019
date	exp (1)	month(2)	1*2
01-01-2019	7076200	9/9	7076200
31-01-2019	405000	8/9	360000
30-04-2019	738000	5/9	410000
31-08-2019	1035000	1/9	115000
	9254200		7961200
calculation of weighted avg rate
6000000*8% = 480000
9000000*10%= 900000
weighted avg rate = total intt/total loan
weighted avg rate =(480000+900000)/15000000
weighted avg rate = 0.092 = 9.2%
interest capitalization
4500000*12%*9/12 = 405000
(7961200-4500000)*9.2%*9/12 = 238823
total interest capitalised = 405000+238823 = 643823
2) calculation of total cost of building
expenditure before int capitalisation =9254200
add interest capitalised = 643823
cost of building = (9254200+643823) = 9898023
3) interest for 2018
loan 4500000*12% = 540000
6000000*8% = 480000
9000000*10% =900000
total interest = 1920000
less: interest capitalised =526200
interest exp in 2018 =(1920000-526200) = 1393800
interest for yr 2019
loan 4500000*12% = 540000
6000000*8% = 480000
9000000*10% = 900000
total interest = 1920000
less: intt capitalised = 643823
interest exp in 2019 = (1920000-643823) = 1276177