Question

In: Accounting

On January 1, 2018, the Mason Manufacturing Company began construction of a building to be used...

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 $ 1,870,000
March 1, 2018 1,560,000
June 30, 2018 1,760,000
October 1, 2018 1,560,000
January 31, 2019 414,000
April 30, 2019 747,000
August 31, 2019 1,044,000


On January 1, 2018, the company obtained a $4,600,000 construction loan with a 15% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $2,000,000 and $8,000,000 with interest rates of 8% and 12%, 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.

Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the specific interest method and interest expense that will appear in the 2018 and 2019 income statements. (Enter your answers in dollars.)

2018 2019
Interest capitalized
Interest expense


What is the total cost of the building? (Enter your answer in dollars.)

Total cost of building


?

  

Solutions

Expert Solution

Expenditure for 2018

Expenditure for 2018

Amount

Time factor

01-Jan-18

1,870,000

12/12

      1,870,000

01-Mar-18

1,560,000

10/12

      1,300,000

30-Jun-18

1,760,000

6/12

          880,000

01-Oct-18

1,560,000

3/12

          390,000

Accumulated capital Expenditure before interest capitalized

6,750,000

Average Accumulated capital Expenditure

      4,440,000

Interest capitalized in 2018

Average Accumulated capital Expenditure

Multiplied by: interest rate

Interest capitalized in 2018

      4,440,000

15%

             666,000

Total capitalized value in 2018

6,750,000

             666,000

7416000

Expenditure for 2019

Expenditure for 2019

Amount

Time factor

01-Jan-19

7416000

9/9

      7,416,000

31-Jan-19

414,000

8/9

          368,000

30-Apr-19

747,000

5/9

          415,000

31-Aug-19

1,044,000

1/9

          116,000

Accumulated capital Expenditure before interest capitalized

9621000

Average accumulated capital Expenditure

      8,315,000

Weighted average rate for other debt

2,000,000

8%

160000

8,000,000

12%

960000

10,000,000

1120000

Weighted average rate for other debt (Total interest/Total loan )

1120000

10,000,000

11.20%

Interest capitalized in 2019

For construction loan

         4,600,000

15.00%

          690,000

Other debt (8315000-4600000)

         3,715,000

11.20%

          416,080

Interest capitalized in 2019

      1,106,080

Interest expense charged to income statement

Construction loan

4,600,000

15.00%

          690,000

Other debt 1

2,000,000

8%

          160,000

Other debt 2

8,000,000

12%

          960,000

Total interest paid

      1,810,000

Interest expense charged to income statement

Year

2018

2019

Total interest paid

         1,810,000

      1,810,000

Less: interest capitalized

             666,000

      1,106,080

Interest expense charged to income statement

         1,144,000

          703,920

Total cost of the building

Expenditure in 2018

      6,750,000

Interest capitalized in 2018

          666,000

Expenditure in 2019

      2,205,000

Interest capitalized in 2019

      1,106,080

Total cost of the building

    10,727,080


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