In: Accounting
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 | $ | 1,300,000 | |
March 1, 2021 | 750,000 | ||
June 30, 2021 | 300,000 | ||
October 1, 2021 | 650,000 | ||
January 31, 2022 | 495,000 | ||
April 30, 2022 | 810,000 | ||
August 31, 2022 | 1,350,000 | ||
On January 1, 2021, the company obtained a $3 million construction
loan with a 10% 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 $4,500,000
and $6,500,000 with interest rates of 5% and 7%, 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.
Solution 1: | |||
Year 2021: Weighted-Average accumulated expenditure and interest capitalized | |||
Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
01 January 2021 | $13,00,000 | 12/12 | $13,00,000 |
01 March 2021 | $7,50,000 | 10/12 | $6,25,000 |
30 June 2021 | $3,00,000 | 6/12 | $1,50,000 |
01 October 2021 | $6,50,000 | 3/12 | $1,62,500 |
Total | $30,00,000 | $22,37,500 | |
*Interest rate | 7.00% | ||
Interest capitalized in 2021 | $1,56,625 | ||
Year 2022: Weighted-Average accumulated expenditure | |||
Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
01 January 2022 | $31,56,625 | 9/9 | $31,56,625 |
31 January 2022 | $4,95,000 | 8/9 | $4,40,000 |
30 April 2022 | $8,10,000 | 5/9 | $4,50,000 |
31 August 2022 | $13,50,000 | 1/9 | $1,50,000 |
Total | $58,11,625 | $41,96,625 | |
*Interest rate | 7.00% | ||
Interest capitalized in 2022 | $2,20,323 | ||
Weighted average interest rate of all debt | |||
Debt | Amount | Interest rate | Interest amount |
Loan | $30,00,000 | 10% | $3,00,000 |
5% Note | $45,00,000 | 5% | $2,25,000 |
7% Note | $65,00,000 | 7% | $4,55,000 |
Totals | $1,40,00,000 | $9,80,000 | |
Weighted average rate (total interets/ total debt) | 7.00% |
Solution 2: | |||
Computation of Cost of Building | |||
Total expenditure before capitalization(5811625-156625) | $56,55,000 | ||
Add: Interest capitalized in 2021 | $1,56,625 | ||
Add: Interest capitalized in 2022 | $2,20,323 | ||
Total cost of Building | $60,31,948 | ||
Solution 3: | |||
Computation of Interest expense | |||
Debt | Amount | Interest rate | Interest amount |
Loan | $30,00,000 | 10% | $3,00,000 |
5% Note | $45,00,000 | 5% | $2,25,000 |
7% Note | $65,00,000 | 7% | $4,55,000 |
Total interest incurred | $9,80,000 | ||
2021 | 2022 | ||
Total inerest incurred | $9,80,000 | $9,80,000 | |
Less: Interest Capitalized | $1,56,625 | $2,20,323 | |
Interest Expense | $8,23,375 | $7,59,677 |