Need help on Chapter 10, Problem 10-10 On January 1, 2013, the Mason Manufacturi
ID: 2358895 • Letter: N
Question
Need help on Chapter 10, Problem 10-10 On January 1, 2013, the Mason Manufacturing company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2014. Expenditures on the project were as follows: January 1, 2013 1,000,000 March 1, 2013 600,000 June 30, 2013 800,000 October 1, 2013 600,000 January 31, 2014 270,000 April 30, 2014 585,000 August 31, 2014 900,000 On January 1, 2013, the company obtained a $3 million constrruction loan with a 10% interest rate. The loan was outstanding all of 2013 and 2014. 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 2013 and 2014. 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 2013 and 2014 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 2013 and 2014 income statements. Help is very much appreciated. Thank you.Explanation / Answer
Weighted-average rate of all debt:
$ 3,000,000 x 10% = $ 300,000
4,000,000 x 6% = 240,000 $ 1,020,000
6,000,000 x 8% = 480,000 $13,000,000 = 7.85%
$13,000,000 $1,020,000
Expenditures for 2013:
Accumulated expenditures (before interest) - $3,000,000
Average accumulated expenditures - $2,050,000
Interest capitalized:
$2,050,000 x 7.85% = $160,925 = Interest capitalized in 2013
Expenditures for 2014:
January 1, 2014 $3,160,925 x 9/9 = $3,160,925
January 31, 2014 270,000 x 8/9 = 240,000
April 30, 2014 585,000 x 5/9 = 325,000
August 31, 2014 900,000 x 1/9 = 100,000
Accumulated expenditures
(before interest) - $4,915,925
Average accumulated expenditures - $3,825,925
Interest capitalized:
$3,825,925 x 7.85% x 9/12 = $225,251 = Interest capitalized in 2012
Cost of Building:
Expenditures in 2013 $3,000,000
Interest capitalized in 2013 160,925
Expenditures in 2014 1,755,000
Interest capitalized in 2014 225,251
Total cost of building $5,141,176
Interest Expense for 2013:
Total interest incurred $1,020,000
Less: Capitalized (160,925)
2011 expense $ 859,075
Interest Expense for 2014:
Total interest incurred $1,020,000
Less: Capitalized (225,251)
2012 expense $ 794,749
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