On January 1, 2016, the Mason Manufacturing Company began construction of a buil

Question

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. $1.280.000 2016 720,000 920,000 720,000 288,000 621,000 918,000 March 1. 2016 2016 2016 2017 June 30, October 1 January 31, April 30, 2017 August 31 2017 On January 1, 2016, the company obtained a $3,200,000 construction loan with a 15% interest rate. The loan was outstanding all of 2016 and 2017. The company's other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 11% and 13%, 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. Requlrec: 1. Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the specific interest method. Interest capital zed 2. What is the total cost of the building? cost 3. Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements. Interest expense

Explanation / Answer

AS 16 - Borrowing Costs 1 Amount of Interest Capitalized On specific borrowing (3200000*15%)      480,000 On non-specific borrowings (3000000*11%)      330,000 On non-specific borrowings (7000000*13%)      910,000 Amount of Interest to be Capitalized 1,720,000 2 Total cost of the building as per AS 16 Cost of Plant (1280000+720000+920000+720000+288000+621000+918000) 5,467,000 Add : Amount of Interest to be Capitalized 1,720,000 7,187,000 3 Interest expense that will appear in the years 2016 and 2017 Date 2016 2017 ( $ 1280000*12/12 ) 1st January, 2016 1,280,000 ( $ 720000*10/12 ) 3rd March, 2016      600,000 ( $ 920000*6/12 ) 30th June, 2016      460,000 ( $ 720000*3/12 ) 1st October, 2016      180,000 ( $ 288000*11/12 ) 31st January, 2017      264,000 ( $ 621000*8/12 ) 30th April, 2017      414,000 ( $ 918000*4/12 ) 31st August, 2017      306,000 Interest Expenses 2,520,000      984,000

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