In: Accounting
On January 1, 2021, the company obtained a $3 million loan with a 11% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 | $ | 1,000,000 | |
March 1, 2021 | 840,000 | ||
June 30, 2021 | 480,000 | ||
October 1, 2021 | 680,000 | ||
January 31, 2022 | 630,000 | ||
April 30, 2022 | 945,000 | ||
August 31, 2022 | 1,620,000 | ||
On January 1, 2021, the company obtained a $3 million construction
loan with a 11% interest rate. Assume the $3 million loan is not
specifically tied to construction of the building. The loan was
outstanding all of 2021 and 2022. The company’s other
interest-bearing debt included two long-term notes of $4,800,000
and $6,800,000 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 weighted-average
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.
Solution 1:
Weighted average interest rate of all debt | |||
Debt | Amount | Interest rate | Interest amount |
Loan | $30,00,000 | 11% | $3,30,000 |
8% Note | $48,00,000 | 8% | $3,84,000 |
10% Note | $68,00,000 | 10% | $6,80,000 |
Totals | $1,46,00,000 | $13,94,000 | |
Weighted average rate (total interets/ total debt) | 9.55% |
Year 2021: Weighted-Average accumulated expenditure and interest capitalized | |||
Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
01 January 2021 | $10,00,000 | 12/12 | $10,00,000 |
01 March 2021 | $8,40,000 | 10/12 | $7,00,000 |
30 June 2021 | $4,80,000 | 6/12 | $2,40,000 |
01 October 2021 | $6,80,000 | 3/12 | $1,70,000 |
Total | $30,00,000 | $21,10,000 | |
*Interest rate | 9.55% | ||
Interest capitalized in 2021 | $2,01,505 | ||
Year 2022: Weighted-Average accumulated expenditure | |||
Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
01 January 2022 | $32,01,505 | 9/9 | $32,01,505 |
31 January 2022 | $6,30,000 | 8/9 | $5,60,000 |
30 April 2022 | $9,45,000 | 5/9 | $5,25,000 |
31 August 2022 | $16,20,000 | 1/9 | $1,80,000 |
Total | $63,96,505 | $44,66,505 | |
*Interest rate | 9.55% | ||
Interest capitalized in 2022 | $3,19,913 |
Solution 2:
Computation of Cost of Building | |||
Total expenditure before capitalization(6396505-201505) | $61,95,000 | ||
Add: Interest capitalized in 2021 | $2,01,505 | ||
Add: Interest capitalized in 2021 | $3,19,913 | ||
Total cost of Building | $67,16,418 | ||
Solution 3: | |||
Computation of Interest expense | |||
Debt | Amount | Interest rate | Interest amount |
Loan | $30,00,000 | 11% | $3,30,000 |
8% Note | $48,00,000 | 8% | $3,84,000 |
10% Note | $68,00,000 | 10% | $6,80,000 |
Total interest incurred | $13,94,000 | ||
2021 | 2022 | ||
Total inerest incurred | $13,94,000 | $13,94,000 | |
Less: Interest Capitalized | $2,01,505 | $3,19,913 | |
Interest Expense | $11,92,495 | $10,74,087 |