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