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 $ 2,020,000 March 1, 2021 1,740,000 June 30, 2021 1,940,000 October 1, 2021 1,740,000 January 31, 2022 441,000 April 30, 2022 774,000 August 31, 2022 1,071,000 On January 1, 2021, the company obtained a $4,900,000 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 $2,000,000 and $8,000,000 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.

Expenditures on the project were as follows:

January 1, 2021	$	2,020,000
March 1, 2021		1,740,000
June 30, 2021		1,940,000
October 1, 2021		1,740,000
January 31, 2022		441,000
April 30, 2022		774,000
August 31, 2022		1,071,000

Answer 1

Requirement 1

Expenditures for 2021
1/1/2021	$   2,020,000.00	x	12/12	$ 2,020,000.00
1/3/2021	$   1,740,000.00	x	10/12	$ 1,450,000.00
30/6/2021	$   1,940,000.00	x	6/12	$     970,000.00
1/10/2021	$   1,740,000.00	x	3/12	$     435,000.00
Accumulated Expenditure( before interest )	$   7,440,000.00
Average Accumulated Expenditure				$ 4,875,000.00
Interest Capitalized for 2021 :
=4875000*12%	$      585,000.00
Expenditures for 2022
1/1/2022	$   8,025,000.00	x	9/12	$ 6,018,750.00
31/1/2022	$      441,000.00	x	8/12	$     294,000.00
30/4/2022	$      774,000.00	x	5/12	$     322,500.00
31/08/2022	$   1,071,000.00	x	1/12	$       89,250.00
Accumulated Expenditure( before interest )	$ 10,311,000.00
Average Accumulated Expenditure				$ 6,724,500.00
Interest Capitalized :
$                                       6,724,500.00
	$   4,900,000.00	x	12%	$     588,000.00
	$   1,824,500.00	x	9.60%	$     175,152.00
Interest Capitalized in 2022:				$     763,152.00

Working :

Weighted-average rate of all other debt:
Long term note	$   2,000,000.00	x	8%	$     160,000.00
Long term note	$   8,000,000.00	x	10%	$     800,000.00
	$ 10,000,000.00			$     960,000.00
Weighted-average rate of all other debt:	9.6%
(960,000/10,000,000)*100

Requirement 2

            Accumulated expenditures 9/30/22

            before interest capitalization (above)                              $10,311,000

            2022 interest capitalized (above) $763,152.00

            Total cost of building                                                      $11,074,152

Requirement 3

2021

             $4,900,000 x 12% =                                                     $   444,000

2,000,000 x    8% = 160,000

8,000,000 x    10% = 800,000

               Total interest incurred                                                      1,548,000

               Less: Interest capitalized                                                   (585,000)

                  2021 interest expense                                               $ 963,000

2022

               Total interest incurred                                                    $1,584,000

               Less: Interest capitalized                                                   (763,152)

               2022 interest expense                                                      $ 784,848