Question

On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021	$	1,300,000
March 1, 2021		750,000
June 30, 2021		300,000
October 1, 2021		650,000
January 31, 2022		495,000
April 30, 2022		810,000
August 31, 2022		1,350,000

On January 1, 2021, the company obtained a $3 million construction loan with a 10% 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 $4,500,000 and $6,500,000 with interest rates of 5% and 7%, 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.

Answer 1

Mason Manufacturing Company
Computation of the interest to be capitalised for 2021
		Fraction
Expenditure date	Accumulated expd.	Num.	Den.	Avg. accumulated expd.
jan. 1,2021	1300000	12	12	1300000
march 1,2021	750000	10	12	625000
June 30,2021	300000	6	12	150000
Oct. 1, 2021	650000	3	12	162500
	3000000			2237500
Total Capitalised interest for 2021 = 2237500 * 10 % = $ 223750
Computation of the interest to be capitalised for 2022
		Fraction
Expenditure date	Accumulated expd.	Num.	Den.	Avg. accumulated expd.
Jan. 1, 2022	2461250	9	9	2461250	( 2237500 + 223750 = 2461250 )
Jan. 31,2022	495000	8	9	440000
April 30, 2022	810000	5	9	450000
Aug. 31, 2022	1350000	1	9	150000
	5116250			3501250
Weighted Average rate of all other debt
4500000	5%	225000
6500000	7%	455000
11000000		680000
680000 / 11000000 = 6.18%
Interest capitalisation ( 2022 )
3000000	10%	300000	9 divided by 12	225000
501250	6.18%	30977.25	9 divided by 12	23233
3501250				248233
Cost of building
Expenditures in 2021	3000000
Intt. Capitalised in 2021	223750
Expenditures in 2022	2655000
Intt. Capitalised in 2022	248233
Total cost of building	6126983
Interest expense for 2021
3000000 * 10% =	300000
4500000 * 5 %	225000
6500000 * 7 %	455000
	980000
Less:- Intt. Capitalised in 2021	223750
2021 expense	756250
Interest expense for 2022
3000000 * 10% =	300000
4500000 * 5 %	225000
6500000 * 7 %	455000
	980000
Less:- Intt. Capitalised in 2022	248233
2022 expense	731767
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