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	$	1,820,000
March 1, 2021		1,440,000
June 30, 2021		1,640,000
October 1, 2021		1,440,000
January 31, 2022		396,000
April 30, 2022		729,000
August 31, 2022		1,026,000

On January 1, 2021, the company obtained a $4,400,000 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 $2,000,000 and $8,000,000 with interest rates of 10% and 12%, 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

		2021	2022
	Interest Capitalized	$               5,88,000	$         7,57,713
	Interest Expense	$            11,88,000	$       10,18,287
	Cost of Building	=	$       98,36,713
	Workings:
	Expenditure for 2021
	Jan 1,2021	$            18,20,000	X	12/12	=	$        18,20,000
	March 1, 2021	$            14,40,000	X	10/12	=	$        12,00,000
	June 30, 2021	$            16,40,000	X	6/12	=	$          8,20,000
	October 1, 2021	$            14,40,000	X	3/12	=	$          3,60,000
		$            63,40,000				$        42,00,000
	Interest Capitalized in 2021
		$            42,00,000	X	14.00%	=	$          5,88,000
	Expenditure for 2022
	Jan 1, 2022 ($6340000+$588000)	$            69,28,000	X	9/9	=	$        69,28,000
	Jan 31, 2022	$               3,96,000	X	8/9	=	$          3,52,000
	April 30, 2022	$               7,29,000	X	5/9	=	$          4,05,000
	August 31. 2022	$            10,26,000	X	1/9	=	$          1,14,000
		$            90,79,000				$        77,99,000
	Interest Capitalized in 2020
	$                       77,99,000
Less:	$                       44,00,000	X	14.00%	X 9/12	=	$          4,62,000
	$                       33,99,000	X	11.60%	X 9/12	=	$          2,95,713
	Interest Capitalized in 2020				=	$          7,57,713
	Weighted Average rate of all debt:-
		$            20,00,000	X	10%	=	$          2,00,000
		$            80,00,000	X	12%	=	$          9,60,000
		$         1,00,00,000				$        11,60,000
		Weighted Average rate of all debt =				11.60%
		($1160000/ 100,00,000)
	Interest Expense for 2021:
	Total Interest Incurred	($4400000*14%)+($2000000*10%)+($8000000*12%)			=	$        17,76,000
	Less : Interest Capitalized				=	$          5,88,000
	2021 Expense				=	$        11,88,000
	Interest Expense for 2022:
	Total Interest Incurred				=	$        17,76,000
	Less : Interest Capitalized				=	$          7,57,713
	2022 Expense				=	$        10,18,287
	Cost of Building
	Expenditure for 2021				=	$        63,40,000
	Interest Capitalized in 2021				=	$          5,88,000
	Expenditure for 2022				=	$        21,51,000
	Interest Capitalized in 2022				=	$          7,57,713
	Cost of Building				=	$        98,36,713