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 $3,300,000 construction loan with a 16% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $2,000,000 and $8,000,000 with interest rates of 10% and 12%, 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.
  

January 1, 2018 $ 1,090,000 March 1, 2018 780,000 June 30, 2018 980,000 October 1, 2018 780,000 January 31, 2019 297,000 April 30, 2019 630,000 August 31, 2019 927,000

Explanation / Answer

Solution(1):

Expenditure for 2018:

Therefore, interest capitalised in 2018= 2,425,000*16%

= $388,000

Expenditure for 2019:

Therefore, Interest capitalised in 2019

=[(3300000*16%*9/12)]+[(4405000-3300000)*11.6%*9/12]

= 396,000+96,135 =$492,135

working notes:

Weighted average rate of all other debt

=[(2,000,000*10%)+(8,000,000*12%)] / (2,000,000+8,000,000)

= (200,000+960,000)/10,000,000

= 0.116 or 11.6%

Solution(2): Calculation of total cost of the building:-

Solution(3): Calculation of the amount of interest expense that will appear in the 2018 and 2019 income statement:-

For 2018:

Total interest incurred = (3300000*16%)+(2000000*10%)+(8000000*12%)

= 528000+200000+960000 = $1,688,000

Less: Interest capitalised. = ($388,000)

Amount of interest expense. = $1,300,000

For 2019:

Total interest incurred = $1,688,000

Less: Interest capitalised. = ($492,135)

Amount of interest expense. = $1,195,865

Date Details($) Amount($) Jan 1, 2018 1,090,000*12/12 1,090,000 Mar 1, 2018 780,000*10/12 650,000 June 30, 2018 980,000*6/12 490,000 Oct 1, 2018 780,000*3/12 195,000 Accumulated Expenditures(before interest) 3,630,000 Average Accumulated Expenditures 2,425,000

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