Question
In: Accounting
On January 1, 2021, the company obtained a $3 million loan with a 14% interest rate....
On January 1, 2021, the company obtained a $3 million loan with a 14% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 $ 1,050,000
March 1, 2021 870,000
June 30, 2021 390,000
October 1, 2021 690,000
January 31, 2022 675,000
April 30, 2022 990,000
August 31, 2022 1,710,000
On January 1, 2021, the company obtained a $3 million construction loan with a 14% 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 $4,900,000 and $6,900,000 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.
Solutions
Expert Solution
| Answer 1: Amount of Interest that Masaon should capitaize in 2021 and 2022 | |||||
| Calculation of Weighted Average Interest Rate as Construction loan is not specific | |||||
| Loan | Amount | Interest Rate | Annual Interest Cost | ||
| Construction loan | $ 3,000,000 | 14% | $ 420,000 | ||
| Long Term Notes (A) | $ 4,900,000 | 5% | $ 245,000 | ||
| Long Term Notes (B) | $ 6,900,000 | 7% | $ 483,000 | ||
| Total | $ 14,800,000 | 7.76% | $ 1,148,000 | ||
| Weighted Average Interest Rate | *($1,148,000/$14,800,000) = 7.76% | ||||
| Schedule for calculation of Weighted-average accumulated expenditures for the period from Jan 1, 2020 to Dec 31, 2020 | |||||
| Payment Date | Expenditures | Capitalization Period | Weight | Weighted Expenditures | |
| Months | |||||
| (A) | (B) | (C=B/12) | (A×C) | ||
| 1-Jan-21 | $ 1,050,000 | 12 | 1 | $ 1,050,000 | |
| 1-Mar-21 | $ 870,000 | 10 | 0.833333333 | $ 725,000 | |
| 30-Jun-21 | $ 390,000 | 6 | 0.5 | $ 195,000 | |
| 1-Oct-21 | $ 690,000 | 3 | 0.25 | $ 172,500 | |
| $ 3,000,000 | $ 2,142,500 | ||||
| Schedule for calculation of Weighted-average accumulated expenditures for the period from Jan 1, 2021 to Sept 30, 2021 | |||||
| Payment Date | Expenditures | Capitalization Period | Weight | Weighted Expenditures | |
| Months | |||||
| (A) | (B) | (C=B/12) | (A×C) | ||
| 31-Jan-22 | $ 675,000 | 8 | 0.666666667 | $ 450,000 | |
| 30-Apr-22 | $ 990,000 | 5 | 0.416666667 | $ 412,500 | |
| 31-Aug-22 | $ 1,710,000 | 1 | 0.083333333 | $ 142,500 | |
| $ 3,375,000 | $ 1,005,000 | ||||
| Interest Cost to be Capitalised | |||||
| Year | Average Accumulated Expenditure | Interest Rates | Interest Cost | Number of months | Interest to be capitalised |
| 2021 | $ 2,142,500 | 7.76% | $ 166,258.00 | 12 | $ 166,258 |
| Total | $ 2,142,500 | $ 166,258.00 | $ 166,258 | ||
| 2022 | $ 2,142,500 | 7.76% | $ 166,258.00 | 9 | $ 124,694 |
| $ 1,005,000 | 7.76% | $ 77,988.00 | 9 | $ 58,491 | |
| Total | $ 3,147,500 | $ 244,246.00 | $ 183,185 | ||
| Answer 2: Total Cost of Building is $ 6,724,443 | |||||
| 2021 | 2022 | Total | |||
| Total Expenditure | $ 3,000,000 | $ 3,375,000 | $ 6,375,000 | ||
| Total Interest to be capitalized | $ 166,258 | $ 183,185 | $ 349,443 | ||
| Total | $ 3,168,279 | $ 3,560,207 | $ 6,724,443 | ||
| Answer 3. Amount of interest expense that will appear in the 2021 and 2022 income statements. | |||||
| Calculation of Interest Expenses that wll appear in 2021 and 2022 Income Statements | |||||
| Loan | Amount | Interest Rate | Annual Interest Cost | ||
| Construction loan | $ 3,000,000 | 14% |
 ekkarill92 answered 1 year agoRelated SolutionsOn January 1, 2021, the company obtained a $3 million loan with a 11% interest rate....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...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate....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
720,000
June 30, 2021
340,000
October 1, 2021
640,000
January 31, 2022
450,000
April 30, 2022
765,000
August 31, 2022
1,260,000
On January 1, 2021, the company obtained a $3 million construction
loan with a 10% interest rate. Assume the $3...
On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate....On January 1, 2021, the company obtained a $3 million loan with
a 12% interest rate. The building was completed on September 30,
2022. Expenditures on the project were as follows:
January 1, 2021
$
1,330,000
March 1, 2021
780,000
June 30, 2021
230,000
October 1, 2021
660,000
January 31, 2022
540,000
April 30, 2022
855,000
August 31, 2022
1,440,000
On January 1, 2021, the company obtained a $3 million construction
loan with a 12% interest rate. Assume the $3...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate....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...
On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate....On January 1, 2021, the company obtained a $3 million loan with
a 12% interest rate. The building was completed on September 30,
2022. Expenditures on the project were as follows:
January 1, 2021
$
1,240,000
March 1, 2021
660,000
June 30, 2021
450,000
October 1, 2021
650,000
January 31, 2022
900,000
April 30, 2022
1,215,000
August 31, 2022
2,160,000
On January 1, 2021, the company obtained a $3 million construction
loan with a 12% interest rate. Assume the $3...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate.....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
$
1,000,000
March 1, 2021
600,000
June 30, 2021
800,000
October 1, 2021
600,000
January 31, 2022
270,000
April 30, 2022
585,000
August 31, 2022
900,000
On January 1, 2021, the company obtained a $3 million
construction loan with a 10% interest rate. Assume the $3...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate....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...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate.....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
$
1,000,000
March 1, 2021
600,000
June 30, 2021
800,000
October 1, 2021
600,000
January 31, 2022
270,000
April 30, 2022
585,000
August 31, 2022
900,000
On January 1, 2021, the company obtained a $3 million
construction loan with a 10% interest rate. Assume the $3...
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate....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...
On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate....On January 1, 2021, the company obtained a $3 million loan with
a 12% interest rate. The building was completed on September 30,
2022. Expenditures on the project were as follows:
January 1, 2021
$
1,050,000
March 1, 2021
630,000
June 30, 2021
710,000
October 1, 2021
610,000
January 31, 2022
315,000
April 30, 2022
630,000
August 31, 2022
990,000
On January 1, 2021, the company obtained a $3 million construction
loan with a 12% interest rate. Assume the $3...
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