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	$	1,200,000
March 1, 2018		660,000
June 30, 2018		520,000
October 1, 2018		620,000
January 31, 2019		360,000
April 30, 2019		675,000
August 31, 2019		1,080,000

On January 1, 2018, the company obtained a $3 million construction loan with a 11% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $4,200,000 and $6,200,000 with interest rates of 6% and 8%, 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 weighted-average 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.

Answer 1

Weighted average rate of all debt:
	$        30,00,000	X	11%	=	$   3,30,000
	$        42,00,000	X	6%	=	$   2,52,000
	$        62,00,000	X	8%	=	$   4,96,000
Total	$     1,34,00,000				$ 10,78,000
	Weighted average rate of all debt	=	$10,78,000 / $1,34,00,000
		=	8.04%
Expenditure for 2018
Jan 1,2018	$        12,00,000	X	12/12	=	$ 12,00,000
March 1, 2018	$           6,60,000	X	10/12	=	$   5,50,000
June 30, 2018	$           5,20,000	X	6/12	=	$   2,60,000
October 1, 2018	$           6,20,000	X	3/12	=	$   1,55,000
	$        30,00,000				$ 21,65,000
Interest Capitalised in 2018
	$        21,65,000	X	8.04%	=	$   1,74,169
Expenditure for 2019
Jan 1, 2019 ($30,00,000+ $1,74,169)	$        31,74,169	X	9/9	=	$ 31,74,169
Jan 31, 2019	$           3,60,000	X	8/9	=	$   3,20,000
April 30, 2019	$           6,75,000	X	5/9	=	$   3,75,000
August 31. 2019	$        10,80,000	X	1/9	=	$   1,20,000
	$        52,89,169				$ 39,89,169
Interest Capitalised in 2019
$         39,89,169	X	8.04%	X 9 /12	=	$   2,40,690
Interest Expense for 2018:
Total Interest Incurred				=	$ 10,78,000
Less : Interest Capitalised				=	$   1,74,169
2018 Expense				=	$   9,03,831
Interest Expense for 2019:
Total Interest Incurred				=	$ 10,78,000
Less : Interest Capitalised				=	$   2,40,690
2019 Expense				=	$   8,37,310
Cost of Building
Expenditure for 2018				=	$ 30,00,000
Interest Capitalised in 2018				=	$   1,74,169
Expenditure for 2019				=	$ 21,15,000
Interest Capitalised in 2019				=	$   2,40,690
Cost of Building				=	$ 55,29,859