On January 1, 2018, the Mason Manufacturing Company began construction of a buil
ID: 2554828 • Letter: O
Question
On January 1, 2018, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2019.
Expenditures on the project were as follows:
On January 1, 2018, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2018 and 2019. 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 2018 and 2019. 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 2018 and 2019 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 2018 and 2019 income statements.
Explanation / Answer
Answer:-
Expenditure of 2018
January 1, 2018$1,000,000x12/12= $1,000,000
March1, 2018$ 600,000x10/12= $500,000
June30, 2018$800,000x6/12= $400,000
October 1, 2018$ 600,000x3/12=$150,000
The Accumulated
Expenditure (before interest)$30,00,000
Average Accumulated expenditures=$2,050,000
Interest capitalized in 2018 =$2,050,000*10%=$205,000
Expenditure of 2019
January1, 2019$3,205,000x9/9=$3,205,000
($3,000,000 + 205,000)
January 31, 2019$270,000x8/9=$240,000
April 30, 2019$585,000x5/9=$325,000
August 31, 2017$ 900,000x1/9=$100,000
The Accumulated
Expenditure (before interest)$4,960,000
Average Accumulated expenditures=$3,870,000
Interest Capitalized
$3,870,000- $3,000,00= $870,000
Interest capitalized in 2019= $271,980
Weighted-average rate of all other debt:
Accumulated expenditures 9/30/19
before interest capitalization$4,960,000
2017 interest capitalized $271,980
Total cost of building$5,231,980
$3,000,000x10% =$300,000
$4,000,000x6% =$240,000
$ 6,000,000x8% =$480,000
Total interest incurred =$1,020,000
Less Interest Capitalized =($205,000)
Interest Expenses =$815,000
Total interest incurred =$1,020,000
Less Interest Capitalized =($271,980)
Interest Expenses =$748,020
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