Question

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	$	1,000,000
March 1, 2021		600,000
June 30, 2021		800,000
October 1, 2021		600,000
January 31, 2022		270,000
April 30, 2022		585,000
August 31, 2022		900,000

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 $4,000,000 and $6,000,000 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.

Answer 1

Answer to Question

the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method.
Computation of Average accumulated expenses	2021	2022
	Amount	Used Month	Cost to be capitalise	Amount	Used Month	Cost to be capitalise
January 1, 2021	10,00,000	12	10,00,000	10,00,000	9	750000
March 1, 2021	6,00,000	9	450000	6,00,000	9	450000
June 30, 2021	8,00,000	6	400000	8,00,000	9	600000
October 1, 2021	6,00,000	3	150000	6,00,000	9	450000
January 31, 2022	2,70,000	0	0	2,70,000	8	180000
April 30, 2022	5,85,000	0	0	5,85,000	5	243750
August 31, 2022	9,00,000	0	0	9,00,000	1	75000
	$ 47,55,000.00		$             20,00,000.00	$ 47,55,000.00		$             27,48,750.00
interest that Mason should capitalize
weighted-average Interest rate is 7.85%	Note 1		$               1,57,000.00			$               2,15,776.88
Note 1
Computation of Average interest rate
Amount	Rate	Interest
30,00,000	10%	300000
40,00,000	6%	240000
60,00,000	8%	480000
$                                                                    1,30,00,000.00		$ 10,20,000.00
weighted-average Interest rate
(Interest/Total Loan Amount )*100	7.85%
the total cost of the building			$             49,12,000.00			$             51,27,776.88
( Cost + Intrest Capitalised)
amount of interest expense that will appear in the 2021 and 2022 income statements
		2021	2022
Amount	Rate	Interest
30,00,000	10%	300000	300000
40,00,000	6%	240000	240000
60,00,000	8%	480000	480000
		$ 10,20,000.00	$             10,20,000.00
Less Interest Capitalised		157000	215776.875
Amount of interest expense that will appear in income statements		$    8,63,000.00	$               8,04,223.13