Question

Problem 10-9 Interest capitalization; specific interest method (L010-7] 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 March 1, 2018 June 30, 2018 October 2016 January 31, 2019 April 30, 2019 August 31, 2019 $1,870,000 1,560, ate 1,760,089 1,560, eee 214.000 747 1,044,999 On January 1 2018, the company obtained a $4,600,000 construction loan with a 15% 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 8% 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 Complete this question by entering your answers in the tabs below. Reg 1 and 3 Reg 2 Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the specific interest method and interest expense that will appear in the 2018 and 2019 income statements. Enter your answers in dollars 2018 2019 Interest capitalized Interest expense Reg 2 >

Answer 1

Answer :-

Req 1-

In 2018-

Date	Expenditure	Fraction	Average Accumulated Expenditure (Expenditure × Fraction)
1/1/2018	1,870,000	12/12	1,870,000
3/1/2018	1,560,000	10/12	1,300,000
6/30/2018	1,760,000	6/12	880,000
10/1/2018	1,560,000	3/12	390,000
Total	6,750,000		4,440,000

Interest Capitalize = Total Average Accumulated Expenditure × Interest rate

Total Average Accumulated Expenditure=$ 4,440,000

Interest rate = 15%

Interest Capitalize = $4,440,000 × 15%

Interest Capitalize in 2018 - $666,000

In 2019 -

Expenditure on 1/1/2019 - Total Expenditure + Interest Capitalize

Expenditure on 1/1/2019 - $6,750,000 + $666,000 = $7,416,000

Date	Expenditures	Fraction	Average Accumulated Expenditure (Expenditure × Fraction)
1/1/2019	7,416,000	9/9	7,416,000
1/31/2019	414,000	8/9	368,000
4/30/2019	747,000	5/9	415,000
8/31/2019	1,044,000	1/9	116,000
Total	9,621,000		8,315,000

To get the weighted average rate:

Principal	Rate	Interest
$ 2,000,000	8%	$160,000
$ 8,000,000	12%	$960,000
$ 10,000,000		$ 1,120,000

Interest rates = 1,120,000 / 10,000,000 = 11.2%

Interest Capitalize in 2019 -

Upto $4,600,000 Interest rate is 15%

After $4,600,000 Interest rate is 11.2%

Therefore,Interest Capitalize =

4,600,000 × 15% = $690,000

(8,315,000 - 4,600,000) × 11.2% = $416,080

Interest Capitalize in 2019 = $690,000 + $416,080

Interest Capitalize in 2019 = $1,106,080

Req 2 -

Total Expenditure in 2019	$9,621,000
Interest Capitalize in 2019	$1,106,080
Total cost of building	$10,727,080

Total Cost of building -$10,727,080

Req 3-

Loan Amount	Interest rate	Interest incurred (Loan amount × Interest rate)
$4,600,000	15%	$690,000
$2,000,000	8%	$160,000
$8,000,000	12%	$960,000
Total Interest incurred		$1,810,000

Interest expense in 2018 -

Total Interest incurred	$1,810,000
Less :- Interest Capitalize in 2018	$666,000
Interest Expense in 2018	$1,144,000

Interest expense in 2019 -

Total Interest incurred	$1,810,000
Less :- Interest Capitalize in 2019	$1,106,080
Interest expense in 2019	$703,920