Question

On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021	$	1,940,000
March 1, 2021		1,680,000
June 30, 2021		1,880,000
October 1, 2021		1,680,000
January 31, 2022		432,000
April 30, 2022		765,000
August 31, 2022		1,062,000

On January 1, 2021, the company obtained a $4,800,000 construction loan with a 14% interest rate. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 6% 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 specific interest 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

Summary of Answer
Answer 1	Interest capitalized in 2021			$          658,000
Answer 1	Interest capitalized in 2022			$          765,690
Answer 2	Total cost of the building			$    10,862,690
Answer 3	Interest expense in 2021			$          894,000
Answer 3	Interest expense in 2022			$          786,310

Answer 1

Expenditure for 2021
Expenditure for 2021	Amount	Time factor	Weighted Average
01-Jan-21	$         1,940,000	12/12	$      1,940,000
01-Mar-21	$         1,680,000	10/12	$      1,400,000
30-Jun-21	$         1,880,000	6/12	$          940,000
01-Oct-21	$         1,680,000	3/12	$          420,000
Accumulated capital Expenditure before interest capitalized	$         7,180,000
Average Accumulated capital Expenditure			$      4,700,000
Interest capitalized in 2021
Average Accumulated capital Expenditure	Multiplied by: interest rate	Interest capitalized in 2021
$                                          4,700,000	14.00%	$              658,000
Total capitalized value in 2021	$         7,180,000	$              658,000	$      7,838,000

Expenditure for 2022
Expenditure for 2022	Amount	Time factor	Weighted Average
01-Jan-22	$         7,838,000	9/9	$      7,838,000
31-Jan-22	$             432,000	8/9	$          384,000
30-Apr-22	$             765,000	5/9	$          425,000
31-Aug-22	$         1,062,000	1/9	$          118,000
Accumulated capital Expenditure before interest capitalized	$       10,097,000
Average accumulated capital Expenditure			$      8,765,000
Weighted average rate for other debt
$                                          3,000,000	6.00%	$              180,000
$                                          7,000,000	10.00%	$              700,000
$                                       10,000,000		$              880,000
Weighted average rate for other debt (Total interest/Total loan )	$             880,000	$        10,000,000	8.80%
Interest capitalized in 2022
For construction loan	$         4,800,000	14.00%	$          672,000
Other debt (8765000-4800000)	$         3,965,000	8.80%	$          348,920
Interest for annual			$      1,020,920
Interest capitalized in 2022 (1020920* 9/12)			$          765,690

Answer 2

The total cost of the building
Expenditure in 2021			$      7,180,000
Interest capitalized in 2021			$          658,000
Expenditure in 2022			$      2,259,000
Interest capitalized in 2022			$          765,690
The total cost of the building			$    10,862,690

Answer 3

Interest expense charged to income statement
Construction loan	$         4,800,000	14.00%	$          672,000
Other debt 1	$         3,000,000	6.00%	$          180,000
Other debt 2	$         7,000,000	10.00%	$          700,000
Total interest paid			$      1,552,000
Interest expense charged to income statement
Year		2021	2022
Total interest paid		$          1,552,000	$      1,552,000
Less: interest capitalized		$              658,000	$          765,690
Interest expense charged to income statement		$              894,000	$          786,310