On January 1, 2018, the Mason Manufacturing Company began construction of a buil
ID: 2607601 • Letter: O
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 11% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $5,700,000 and $7,700,000 with interest rates of 5% and 7%, 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.
Explanation / Answer
Requirement 1
2018:
Expenditures for 2018:
January 1, 2018 $1,260,000 x 12/12 = $1,260,000
March 1, 2018 750,000 x 10/12 = 625,000
June 30, 2018 310,000 x 6/12 = 155,000
October 1, 2018 680,000 x 3/12 = 170,000
Accumulated expenditures
(before interest) - $3,000,000
Average accumulated expenditures - $2,210,000
Interest capitalized:
$2,210,000 x 7.04% = $155,584 = Interest capitalized in 2018
* Weighted-average rate of all debt:
$ 3,000,000 x 11% = $ 330,000 $1,154,000
5,700,000 x 5% = 285,000 = 7.04% (rounded)
7,700,000 x 7% = 539,000 $16,400,000
$16,400,000 $1,154,000
2019:
January 1, 2019
($3,000,000 + 155,584) $3,155,584 x 9/9 = $3,155,584
January 31, 2019 1,035,000 x 8/9 = 920,000
April 30, 2019 1,350,000 x 5/9 = 750,000
August 31, 2019 2,430,000 x 1/9 = 270,000
Accumulated expenditures
(before interest) - $7,970,584
Average accumulated expenditures - $5,095,584
Interest capitalized:
$5,095,584 x 7.04% x 9/12 = $269,047 = Interest capitalized in 2019
Requirement 2
Accumulated expenditures 9/30/19
before interest capitalization (above) $7,970,584
2019 interest capitalized (above) 269,047
Total cost of building $8,239,631
Requirement 3
2018
$3,000,000 x 11% = $ 330,000
5,700,000 x 5% = 285,000
7,700,000 x 7% = 539,000
Total interest incurred 1,154,000
Less: Interest capitalized (155,584)
2018 interest expense $ 998,416
2019
Total interest incurred $1,154,000
Less: Interest capitalized (269,047)
2019 interest expense $ 884,953
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