4 (of 4) value: 100 points On January 1,2016, the Mason Manufacturing Company be

Question

4 (of 4) value: 100 points On January 1,2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters The building was completed on September 30, 2017 Expenditures on the project were as follows: January 1, 2016 March 1, 2016 June 30, 2016 October 1, 2016 January 31.2017 April 30, 2017 August 31, 2017 $1,000,000 600,000 800,000 600,000 270,000 585,000 900,000 On January 1, 2016, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2016 and 2017. 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 2016 and 2017. Interest is paid annually on all debt. The company's fiscal year-end is December 31 Required:

Explanation / Answer

For 2016:

Date Expenditure Average Accumulated Expenditure
1/1/2016 1,000,000 x 12/12 1,000,000
3/1/2016 600,000 x 10/12 500,000
6/30/2016 800,000 x 6/12 400,000
10/1/2016 600,000 x 3/12 150,000
Total: 2,050,000

Interest capitalized for 2016=2,050,000 x 10% = 205000
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3,000,000 x 10% = 300,000
4,000,000 x 6%= 240,000
6,000,000 x 8% = 480,000
Total= 1,020,000
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1,020,000 - 205,000= 815,000 (interest expense 2016)

(3,000,000 + 205000 = 3,205,000) this total goes to 2017
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other outstanding notes:

4,000,000 x 6% = 240,000
6,000,000 x 8% = 480,000
total:
10,000,000 720,000
weighted avg= 720,000/10,000,000 = 7.2%
2017

1/1/2017 3,205,000 x 9/9 = 3,205,000 (because the project completed Sep.2017,it's divided by 9)
1/31/2017 270,000 x 8/9 = 240,000
4/30/2017 585,000 x 5/9 = 325000
8/31/2017 900,000 x 1/9 = 100,000
Total = 3,870,000

from 3,870,000===> 3,000,000 x 10% = 300,000 x 10% x 9/12 = 22500
and remaining ==> 870,000 x 7.2% x 9/12 = 46980

interest capitalized in 2017 ==> 22,500 + 46980 = 271,980

1,020,000 - 271,980 = 748020 (interest expense 2017)
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Cost of Building = 3,205,000 + 270,000 + 585,000 + 900,000 + 271,980= 5,231,980

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