Question

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 $ 1,200,000 March 1, 2018 900,000 June 30, 2018 1,100,000 October 1, 2018 900,000 January 31, 2019 315,000 April 30, 2019 648,000 August 31, 2019 945,000 On January 1, 2018, the company obtained a $3,500,000 construction loan with a 12% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 8% and 10%, 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.

Answer 1

1	Weighted Average rate for all other debt
	loan	roi	intt
	$3,500,000	12%	420000
	$3,000,000	8%	240000
	$7,000,000	10%	700000
	$   13,500,000		1360000
	weighted avg rate = $1360000/13,500,000
		10.07%
	Date	Amount	Weight	Average
	01-01-18	$        1,200,000	12/12	$   1,200,000
	01-03-18	$            900,000	10/12	$      750,000
	30-06-18	$            110,000	6/12	$         55,000
	01-10-18	$            900,000	3/12	$      225,000
		$        3,110,000		$   2,230,000
	Interest to be capitalised in year 2018 = $2,230,000*10.07%
	=	$      224,651.85
	Date	Amount	Weight	Average
	31-01-19	315000	8/9	280000
	30-04-19	648000	5/9	360000
	31-08-19	945000	01/09	105000
		$        1,908,000		$      745,000
	Interest to be capitalised in year 2019 = $745000*10.07%*9m/12mnth
	=	$        56,288.89
	2. What is the total cost of the building
	Cost of Building:
	Expenditures in 2018		$    3,110,000
	Interest capitalized in 2018		$ 224,651.85
	Expenditures in 2019		$    1,908,000
	Interest capitalized in 2019		$    56,288.89
	Total cost of Building		$    5,298,941
3	Calculate the amount of interest expense that will appear in the 2018 and 2019 income statements
	Interest Expense for 2018			$   1,360,000
	Less: Interest capitalized in 2018			$      224,652
	Interest to charged too P & L in 2018			$   1,135,348
	Interest Expense for 2019			$   1,360,000
	Less: Interest capitalized in 2019			$         56,289
	Interest to charged too P & L in 2019			$   1,303,711