Question

On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021 $ 1,680,000

March 1, 2021 1,260,000

June 30, 2021 1,460,000

October 1, 2021 1,260,000

January 31, 2022 369,000

April 30, 2022 702,000

August 31, 2022 999,000

On January 1, 2021, the company obtained a $4,000,000 construction loan with a 12% interest rate. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 8% and 10%, 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 specific interest 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

		2021	2022
	Interest Capitalised	$               4,53,000	$   5,67,411
	Interest Expense	$               9,67,000	$   8,52,589
	Total cost of building	$            87,50,411
	Workings:
	Expenditure for 2021
	Jan 1,2021	$            16,80,000	X	12/12	=	$        16,80,000
	March 1, 2021	$            12,60,000	X	10/12	=	$        10,50,000
	June 30, 2021	$            14,60,000	X	6/12	=	$          7,30,000
	October 1, 2021	$            12,60,000	X	3/12	=	$          3,15,000
		$            56,60,000				$        37,75,000
	Interest Capitalised in 2021
		$            37,75,000	X	12.00%	=	$          4,53,000
	Expenditure for 2022
	Jan 1, 2022 ($5660000+$453000)	$            61,13,000	X	9/9	=	$        61,13,000
	Jan 31, 2022	$               3,69,000	X	8/9	=	$          3,28,000
	April 30, 2022	$               7,02,000	X	5/9	=	$          3,90,000
	August 31. 2022	$               9,99,000	X	1/9	=	$          1,11,000
		$            81,83,000				$        69,42,000
	Interest Capitalised in 2022
	$                      69,42,000
Less:	$                      40,00,000	X	12.00%	X 9/12	=	$          3,60,000
	$                      29,42,000	X	9.40%	X 9/12	=	$          2,07,411
	Interest Capitalised in 2022	=	$          5,67,411
	Weighted Average rate of all debt:-
		$            30,00,000	X	8%	=	$          2,40,000
		$            70,00,000	X	10%	=	$          7,00,000
		$         1,00,00,000				$          9,40,000
		Weighted Average rate of all debt =		9.40%
		($940000 / $ 10000000)
	Interest Expense for 2021:
	Total Interest Incurred	($40,00,000*12%)+($30,00,000*8%)+($70,00,000*10%)	=	$        14,20,000
	Less : Interest Capitalised				=	$          4,53,000
	2021 Expense				=	$          9,67,000
	Interest Expense for 2022:
	Total Interest Incurred				=	$        14,20,000
	Less : Interest Capitalised				=	$          5,67,411
	2022 Expense				=	$          8,52,589
	Cost of Building
	Expenditure for 2021				=	$        56,60,000
	Interest Capitalised in 2021				=	$          4,53,000
	Expenditure for 2022				=	$        20,70,000
	Interest Capitalised in 2022				=	$          5,67,411
	Cost of Building				=	$        87,50,411