On January 1, 2018, the Mason Manufacturing Company began construction of a buil

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: 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

1) . Expenditures for 2018 :-

Interest Capitalized in 2018 :-

= $2325000 * 12% = $279000

Expenditures for 2019 :-

Interest Capitalized in 2019

=> $3100000 * 12% * 9/12 = $279000

=> ($4068000 - $3100000) * 9.2% * 9/12 = $66792

Interest Capitalized in 2019 = $279000 + $66792 = $345792

Weighted Average rate of all other debt :-

=> $4000000 * 8% = $320000

=> $6000000 * 10% = $600000

Rate = ($320000+$600000) / ($4000000+$6000000)

= $920000 / 10000000

= 0.092 or 9.2%

2). Total Cost of Building :-

3). Interest Exp. for 2018 :-

Interest Expense for 2019 :-

Date Calculation Amount ($) Jan. 1 2018 $1180000*12/12 1180000 Mar. 1, 2018 $660000*10/12 550000 Jun. 30, 2018 $860000*6/12 430000 Oct. 1, 2018 $660000*3/12 165000 Accumulated Exp. (Before Interest) $3360000 Average accumulated exp. 2325000

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