Question

On January 1, 2018, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2019. Expenditures on the project were as follows: January 1, 2018 $ 1,710,000 March 1, 2018 1,320,000 June 30, 2018 1,520,000 October 1, 2018 1,320,000 January 31, 2019 378,000 April 30, 2019 711,000 August 31, 2019 1,008,000 On January 1, 2018, the company obtained a $4,200,000 construction loan with a 16% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $4,000,000 and $6,000,000 with interest rates of 12% and 14%, respectively. Both notes were outstanding during all of 2018 and 2019. 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 2018 and 2019 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 2018 and 2019 income statements.

Answer 1

Summary of Answer
Answer 1	Interest capitalized in 2018			624,000
Answer 1	Interest capitalized in 2019			814,563
Answer 2	Total cost of the building			9,405,563
Answer 3	Interest expense in 2018			1,368,000
Answer 3	Interest expense in 2019			1,177,437

Specific interest method
Expenditure for 2018
Expenditure for 2018	Amount	Time factor
01-Jan-18	1,710,000	12/12	1,710,000
01-Mar-18	1,320,000	10/12	1,100,000
30-Jun-18	1,520,000	6/12	760,000
01-Oct-18	1,320,000	3/12	330,000
Accumulated capital Expenditure before interest capitalized	5,870,000
Average Accumulated capital Expenditure			3,900,000
Interest capitalized in 2018
Average Accumulated capital Expenditure	Multiplied by: interest rate	Interest capitalized in 2018
3,900,000	16.00%	624,000
Total capitalized value in 2018	5,870,000	624,000	6,494,000
Expenditure for 2019
Expenditure for 2019	Amount	Time factor
01-Jan-19	6,494,000	9/9	6,494,000
31-Jan-19	378,000	8/9	336,000
30-Apr-19	711,000	5/9	395,000
31-Aug-19	1,008,000	1/9	112,000
Accumulated capital Expenditure before interest capitalized	8,591,000
Average accumulated capital Expenditure			7,337,000
Weighted average rate for other debt
4,000,000	12.00%	480,000
6,000,000	14.00%	840,000
10,000,000		1,320,000
Weighted average rate for other debt (Total interest/Total loan )	1,320,000	10,000,000	13.20%
Interest capitalized in 2019
For construction loan	4,200,000	16.00%	672,000
Other debt (7337000-4200000)	3,137,000	13.20%	414,084
Interest for annual			1,086,084
Interest capitalized in 2019 (1086084* 9/12)			814,563
Interest expense charged to income statement
Construction loan	4,200,000	16.00%	672,000
Other debt 1	4,000,000	12.00%	480,000
Other debt 2	6,000,000	14.00%	840,000
Total interest paid			1,992,000
Interest expense charged to income statement
Year		2018	2019
Total interest paid		1,992,000	1,992,000
Less: interest capitalized		624,000	814,563
Interest expense charged to income statement		1,368,000	1,177,437
Total cost of the building
Expenditure in 2018			5,870,000
Interest capitalized in 2018			624,000
Expenditure in 2019			2,097,000
Interest capitalized in 2019			814,563
Total cost of the building			9,405,563