Question

On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021	$	1,330,000
March 1, 2021		780,000
June 30, 2021		230,000
October 1, 2021		660,000
January 31, 2022		540,000
April 30, 2022		855,000
August 31, 2022		1,440,000

On January 1, 2021, the company obtained a $3 million construction loan with a 12% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $4,600,000 and $6,600,000 with interest rates of 6% and 8%, respectively. Both notes were outstanding during all of 2021 and 2022. 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 2021 and 2022 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 2021 and 2022 income statements.

Question

1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method and interest expense that will appear in the 2021 and 2022 income statements. ("Round "Weighted-average rate of all debt" to 2 decimal places but do not round other intermediate calculations. Round your answers to the nearest whole dollar.

2. What is the total cost of the building? ("Round "Weighted-average rate of all debt" to 2 decimal places but do not round other intermediate calculations. Round your answer to the nearest whole dollar.)

Answer 1

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	2021	2022
Interest Capitalized	$              1,85,320	$         2,64,470
Interest Expense	$              9,78,680	$         8,99,530
Total cost of building	$            62,84,790
Workings:
Weighted Average rate of all debt:-
	$            30,00,000	X	12%	=	$          3,60,000
	$            46,00,000	X	6%	=	$          2,76,000
	$            66,00,000	X	8%	=	$          5,28,000
	$        1,42,00,000				$       11,64,000
	Weighted Average rate of all debt =				8.20%
	($1164000/ $14200000)
Expenditure for 2021
Jan 1,2021	$            13,30,000	X	12/12	=	$       13,30,000
March 1, 2021	$              7,80,000	X	10/12	=	$          6,50,000
June 30, 2021	$              2,30,000	X	6/12	=	$          1,15,000
October 1, 2021	$              6,60,000	X	3/12	=	$          1,65,000
	$            30,00,000				$       22,60,000
Interest Capitalized in 2021
	$            22,60,000	X	8.20%	=	$          1,85,320
Expenditure for 2022
Jan 1, 2022 ($3000000 + $185320)	$            31,85,320	X	9/9	=	$       31,85,320
Jan 31, 2022	$              5,40,000	X	8/9	=	$          4,80,000
April 30, 2022	$              8,55,000	X	5/9	=	$          4,75,000
August 31. 2022	$            14,40,000	X	1/9	=	$          1,60,000
	$            60,20,320				$       43,00,320
Interest Capitalized in 2022
$                      43,00,320	X	8.20%	X 9/12	=	$          2,64,470
Cost of Building
Expenditure for 2021				=	$       30,00,000
Interest Capitalized in 2021				=	$          1,85,320
Expenditure for 2022				=	$       28,35,000
Interest Capitalized in 2022				=	$          2,64,470
Total cost of building				=	$       62,84,790
Interest Expense for 2021:
Total Interest Incurred				=	$       11,64,000
Less : Interest Capitalized				=	$          1,85,320
2021 Expense				=	$          9,78,680
Interest Expense for 2022:
Total Interest Incurred				=	$       11,64,000
Less : Interest Capitalized				=	$          2,64,470
2022 Expense				=	$          8,99,530