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	$	2,020,000
March 1, 2021		1,740,000
June 30, 2021		1,940,000
October 1, 2021		1,740,000
January 31, 2022		441,000
April 30, 2022		774,000
August 31, 2022		1,071,000

On January 1, 2021, the company obtained a $4,900,000 construction loan with a 12% interest rate. The loan was outstanding all of 2021 and 2022. 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 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.

Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the specific interest method and interest expense that will appear in the 2021 and 2022 income statements. (Do not round intermediate calculations.)

	2021 2022 Interest capitalized Interest expense

What is the total cost of the building? (Do not round intermediate calculations.)

	Total cost of building

Answer 1

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Part 1
Expenditures for 2021
January 1 2021	$             2,020,000	*12/12	$     2,020,000
March 1 2021	$             1,740,000	*10/12	$     1,450,000
June 30 2021	$             1,940,000	*6/12	$         970,000
October 1 2021	$             1,740,000	*3/12	$         435,000
Accumulated Expenditure (Before interest)	$             7,440,000
Average Accumulated Expenditure			$     4,875,000
Interest Capitalized	$4,875,000*12%		$         585,000
Expenditures for 2022
January 1 2022 ($7,440,000+$585,000)	$             8,025,000	*9/9	$     8,025,000
January 31 2022	$                 441,000	*8/9	$         392,000
April 30 2022	$                 774,000	*5/9	$         430,000
August 31 2022	$             1,071,000	*1/9	$         119,000
Accumulated Expenditure (Before interest)	$           10,311,000
Average Accumulated Expenditure			$     8,966,000
Interest Capitalized:
			Rate		Interest
Average Accumulated Expenditure		$     8,966,000
Less: Loan		$   -4,900,000	12%	$4,900,000*12%*9/12	$   441,000
See working below for rate		$     4,066,000	9.60%	$4,066,000*9.6%*9/12	$   292,752
Total					$   733,752
Working
	$             2,000,000	8%	$         160,000
	$             8,000,000	10%	$         800,000
	$           10,000,000		$         960,000
$960,000/$10,000,000		9.60%
Part 2
Accumulated Expenditure (Before interest)	Year 2022		$   10,311,000
Add: 2022 Interest			$         733,752
Cost of Building			$   11,044,752
Part 3
Year 2021
$4,900,000*12%		$        588,000
$2,000,000*8%		$        160,000
$8,000,000*10%		$        800,000
Total Interst Incurred		$     1,548,000
Less: Interest Capitalized	From Part-1	$       -585,000
2021 Interest Expense		$        963,000
Year 2022
Total Interst Incurred		$     1,548,000
Less: Interest Capitalized	From Part-2	$       -733,752
2022 Interest Expense		$        814,248