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	$	1,000,000
March 1, 2018		600,000
June 30, 2018		800,000
October 1, 2018		600,000
January 31, 2019		270,000
April 30, 2019		585,000
August 31, 2019		900,000

On January 1, 2018, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $4,000,000 and $6,000,000 with interest rates of 6% and 8%, 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 weighted-average 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

Answer:-

1. Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the weighted-average method.

Expenditure of 2018

January 1, 2018$1,000,000x12/12= $1,000,000

March1, 2018$ 600,000x10/12= $500,000

June30, 2018$800,000x6/12= $400,000

October 1, 2018$ 600,000x3/12=$150,000

The Accumulated

Expenditure (before interest)$30,00,000

Average Accumulated expenditures=$2,050,000

Interest capitalized in 2018 =$2,050,000*10%=$205,000

Expenditure of 2019

January1, 2019$3,205,000x9/9=$3,205,000

($3,000,000 + 205,000)

January 31, 2019$270,000x8/9=$240,000

April 30, 2019$585,000x5/9=$325,000

August 31, 2017$ 900,000x1/9=$100,000

The Accumulated

Expenditure (before interest)$4,960,000

Average Accumulated expenditures=$3,870,000

Interest Capitalized

$3,870,000- $3,000,00= $870,000

Interest capitalized in 2019= $271,980

Weighted-average rate of all other debt:

1. What is the total cost of the building?

Accumulated expenditures 9/30/19

before interest capitalization$4,960,000

2017 interest capitalized $271,980

Total cost of building$5,231,980

1. Calculate the amount of interest expense that will appear in the 2018 and 2019 income statements.

  $3,000,000x10%                             =$300,000

      $4,000,000x6%                               =$240,000

       $ 6,000,000x8%                             =$480,000

Total interest incurred                          =$1,020,000

Less Interest Capitalized                      =($205,000)

Interest Expenses                                =$815,000

Total interest incurred                          =$1,020,000

Less Interest Capitalized                      =($271,980)

Interest Expenses                                =$748,020