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	$	1,420,000
March 1, 2018		1,140,000
June 30, 2018		1,340,000
October 1, 2018		1,140,000
January 31, 2019		351,000
April 30, 2019		684,000
August 31, 2019		981,000

On January 1, 2018, the company obtained a $3,900,000 construction loan with a 12% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $6,000,000 and $9,000,000 with interest rates of 8% and 10%, 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			$             399,000
Answer 1	Interest capitalized in 2019			$             512,460
Answer 2	Total cost of the building			$         7,967,460
Answer 3	Interest expense in 2018			$         1,449,000
Answer 3	Interest expense in 2019			$         1,335,540

Calculation Parts

Specific interest method
Expenditure for 2018
Expenditure for 2018	Amount	Time factor
01-Jan-18	1,420,000	12/12	1,420,000
01-Mar-18	1,140,000	10/12	950,000
30-Jun-18	1,340,000	6/12	670,000
01-Oct-18	1,140,000	3/12	285,000
Accumulated capital Expenditure before interest capitalized	5,040,000
Average Accumulated capital Expenditure			3,325,000
Interest capitalized in 2018
Average Accumulated capital Expenditure	Multiplied by: interest rate	Interest capitalized in 2018
3,325,000	12.00%	399,000
Total capitalized value in 2018	5,040,000	399,000	5,439,000
Expenditure for 2019
Expenditure for 2019	Amount	Time factor
01-Jan-19	5,439,000	9/9	5,439,000
31-Jan-19	351,000	8/9	312,000
30-Apr-19	684,000	5/9	380,000
31-Aug-19	981,000	1/9	109,000
Accumulated capital Expenditure before interest capitalized	7,455,000
Average accumulated capital Expenditure			6,240,000
Weighted average rate for other debt
6,000,000	8.00%	480,000
9,000,000	10.00%	900,000
15,000,000		1,380,000
Weighted average rate for other debt (Total interest/Total loan )	1,380,000	15,000,000	9.20%
Interest capitalized in 2019
For construction loan	3,900,000	12.00%	468,000
Other debt (6240000-3900000)	2,340,000	9.20%	215,280
Interest for annual			683,280
Interest capitalized in 2019 (683280*9/12)			512,460
Interest expense charged to income statement
Construction loan	3,900,000	12.00%	468,000
Other debt 1	6,000,000	8.00%	480,000
Other debt 2	9,000,000	10.00%	900,000
Total interest paid			1,848,000
Interest expense charged to income statement
Year		2018	2019
Total interest paid		1,848,000	1,848,000
Less: interest capitalized		399,000	512,460
Interest expense charged to income statement		1,449,000	1,335,540
Total cost of the building
Expenditure in 2018			5,040,000
Interest capitalized in 2018			399,000
Expenditure in 2019			2,016,000
Interest capitalized in 2019			512,460
Total cost of the building			7,967,460