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	$	1,050,000
March 1, 2018		870,000
June 30, 2018		390,000
October 1, 2018		690,000
January 31, 2019		675,000
April 30, 2019		990,000
August 31, 2019		1,710,000

On January 1, 2018, the company obtained a $3 million construction loan with a 14% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $4,900,000 and $6,900,000 with interest rates of 5% and 7%, 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 weighted-average 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

1. Calculation of weighted average rate of interest :

3000000 × 14% = 420000

4900000 × 5% = 245000

6900000 × 7% =   483000

14800000     1148000

Weighted Average rate of inrerest = (total interest paid ÷ total

funds used)

= (1148000 ÷ 14800000)×100 = 7.757 %.

Intrest for year 2018.

Date	Expenditure	Outstanding for number Of months during the year	Calculation for interest	Interest
January 1, 2018	1050000	12	1050000 ×12/12 × 7.757%	81449
March 1, 2018	870000	10	870000 × 10/12 ×7.757%	56238
June 30, 2018	390000	6	390000 × 6/12 × 7.757%	15126
October 1, 2018	690000	3	690000 × 3/12 × 7.757%	13381
Total				166194

Total Interest Manson should capitalize in 2018 = 166194

Interest for the year 2019

Date	Expediture	Outstanding for number Of months during the year till September, 30	Calculation for interest	Interest
January 31, 2019	675000	8	675000 × 8/12 × 7.757%	34907
April 31, 2019	990000	5	990000 × 5/12 × 7.757%	31998
August 31, 2019	1710000	1	1710000 × 1/12 × 7.757%	11054
Total				77959

Total Interest Manson should capitalize in 2019 = 77959.

2. Total Cost of building.

= total expenditure incurred till september 30, 2019 + total interest capitalize.

Expenditure in 2018 :	$
1050000
870000
390000
690000	3000000
Interest in 2018	166194
Expenditure in 2019 :
675000
990000
1710000	3375000
Interest in 2019	77959
Total Cost of Building	6619153

3. Interet expense that should appear in 2018 and 2019 income statements.

2018	$	2019	$
Total Interest	1148000	Total Interest	1148000
Intrest Capitalized	116194	Intrest Capitalized	77959
Intrest Expense for the year	1031806	Intrest Expense for the year	1070041