Need help on Chapter 10, Problem 10-10 On January 1, 2013, the Mason Manufacturi

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 specific interest 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

For 2011:

Date Expenditure Average Accumulated Expenditure
1/1/2011 1,000,000 x 12/12 1,000,000
3/1/2011 600,000 x 10/12 500,000
6/30/2011 800,000 x 6/12 400,000
10/1/2011 600,000 x 3/12 150,000
Total: 2,050,000

Interest capitalized for 2011=2,050,000 x 10% = 205000
---------------------------------------...
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
---------------------------------------...
1,020,000 - 205,000= 815,000 (interest expense 2011)

(3,000,000 + 205000 = 3,205,000) this total goes to 2012
---------------------------------------...
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%
2012

1/1/2012 3,205,000 x 9/9 = 3,205,000 (because the project completed Sep.2012,it's divided by 9)
1/31/2012 270,000 x 8/9 = 240,000
4/30/2012 585,000 x 5/9 = 325000
8/31/2012 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 2012 ==> 22,500 + 46980 = 271,980

1,020,000 - 271,980 = 748020 (interest expense 2012)
---------------------------------------...
Cost of Building = 3,205,000 + 270,000 + 585,000 + 900,000 + 271,980= 5,231,980

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.