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:

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 $4,400,000 and $6,400,000 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 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.

January 1, 2018 $ 1,300,000 March 1, 2018 720,000 June 30, 2018 340,000 October 1, 2018 640,000 January 31, 2019 450,000 April 30, 2019 765,000 August 31, 2019 1,260,000

Explanation / Answer

1 Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the weighted-average method. Weighted average rate of All debt Loan Amount rate Interest 30,00,000 10% 300000 4400000 8% 352000 6400000 10% 640000 1,38,00,000 12,92,000 Average rate of debt =1292,000/13800,000 =9.36% Accumulated expenditures for 2018 date Amount Months use average expenditure 01/01/2018 1300000 12 1300000 march 1,2018 720000 10 600000 june 30 2018 340000 6 170000 oct 1,2018 6,40,000 3 160000 Accumulated expenditures before interest 3000000 Average accumulated expenditures 2230000 Interest capitalised during year 2018 =2230000*9.36% =$208,728 Accumulated expenditure for 2019 Amount Months use average expenditure jan1,2019 (3000,000+208728) 3208728 9 2406546 jan 31,2019 450000 8 300000 April 30 2019 765000 5 318750 August 31,2019 1260000 1 105000 Accumulated expenditures before interest 5683728 Average accumulated expenditures 3130296 Interest capitalised during year 2019 =3130296*9.36%*9/12 =$219,747 2 the total cost of the building? Amount in $ Total cost Incurred in 2018 3000000 Total cost Incurred in 2019 2475000 capitalised interest for 2018 208728 capitalised interest for 2019 219747 Total cost 5903475 3 amount of interest expense that will appear in the 2018 and 2019 2018 Interest expenses Interest charged on construction loan 3000000*10% 300000 Long term notes 8% 4400000*8% 352000 Long term notes 10% 6400000*10%' 640000 capitalised interest for 2018 -208728 1083272 2019 Interest expenses Interest charged on construction loan 3000000*10% 300000 Long term notes 8% 4400000*8% 352000 Long term notes 10% 6400000*10%' 640000 capitalised interest for 2019 -219747 1072253

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