Problem 10-9 Interest capitalization; specific interest method [LO10-7] On Janua
ID: 2575247 • Letter: P
Question
Problem 10-9 Interest capitalization; specific interest method [LO10-7] 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:
January 1, 2018 $ 1,180,000
March 1, 2018 660,000
June 30, 2018 860,000
October 1, 2018 660,000
January 31, 2019 279,000
April 30, 2019 612,000
August 31, 2019 909,000
On January 1, 2018, the company obtained a $3,100,000 construction loan with a 12% 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 8% and 10%, 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 specific interest 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
Requirement 1 Expenditures for the year 2018 Avg accumulated exp January 1 2018 1180000 1180,000 *12/12 1180000 march 1 2018 660000 660,000*10/12 550000 June 30 2018 860000 860000*6/12 430000 October 1 2018 660000 660,000*3/12 165000 Accumulated expenditures 3360000 Average accumulated expenditures 2325000 Interest capitalised in 2018 : 2325,000*12% =$279,000 Avg accumulated exp January 1 :3,360,000+279000 3639000 3639,000*9/9 3639000 January 31 2019 279000 279000*8/9 248000 april 30,2019 612000 612000*5/9 340000 Augest 31, 2019 909000 909000*1/9 101000 Accumulated expenditures 5439000 Average accumulated expenditures 4328000 Interest to be capitalised Interest capitalised in 2019 = $279000+$84732 =$363,732 3,100,000*12%*9/12 =279000 1,228,000*9.2% *9/12 =84732 ** Weighted average rate of Long term Debt Interest 4000000*8% 320000 6000000*10% 600000 920000 Average Interest rate =920,000 /10,000,000 *100 =9.2% Requiremetn 2 : Total Cost of the Building Amount Expenditures in 2018 3360000 Interest capitalised in 2018 279000 Expenditures in 2019 1800000 Interest capitalised in 2019 (279000+84732) 363732 Total Cost of the Building 5802732 Requirement 3: Interest Expense for the years 2018 and 2019 Total Interest Incurred Amount loan 3100,000 *12% 372000 long term notes : 4000,000 *8% 320000 long term notes : 6000,000 *10% 600000 1292000 Total interest Incurred for 2018 Interest incurred 1292000 less: Interest capitalised for 2018 279000 2018 Interest expense 1013000 Total interest Incurred for 2019 Interest incurred 1292000 less: Interest capitalised for 2019 363732 2019 Interest expense 928268
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