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: January 1, 2018 March 1, 2018 June 30, 2018 October 1, 2018 January 31, 2019 April 30, 2019 August 31, 2019 $1,350,000 1, 080, 000 1, 280,000 1,080,000 342, 000 675, 000 972, 000 On January 1, 2018, the company obtained a $3,800,000 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 $4,000,000 and $6,000,000 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 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. Req 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.) 2019 35,939 2018 474,000 5,061,000 Interest capitalized Interest expense $ $ $

Answer 1

1 Ans)  The amount of interest that Mason should capitalize using specific interest method.

1st Step- For specific borrowing the interest rate is 15%.

For general borrowing the interest rate is a) 4,000,000*8%= $320,000

b) 6,000,000*10%= $600,000

So the general interest rate is Total borrowings/Total interest=10,000,000/920,000=10.87%

Total interest to be capitalized in 2018-

Date Particulars Specific($) General($)   Total($)

Jan 1,2018 1350000*15% 202,500 202,500

Mar 1,2018 1080000*15%*10/12 135,000 135,000

June 30,2018 1280000*15%*6/12 96,000 96,000

Oct 1,2018 90000*15%*3/12 3375 3,375

Oct 1,2018 (1080000-90000)*10.87%*3/12 254.25 254.25

Total interest to be capitalized in 2018 436,875 254.25 437,129.25

Interest to be capitalized in 2019

Opening balance-5,227,129.25

(1350000+1080000+1280000+90000+990000+436875+254.25)

Out of this 3800000 is specific portion and the rest ie, (5227129.25-3800000=1427129.25 is general portion

Date Particulars Specific($) General($) Total($)

Jan 1,2019 3800000*15%*9/12 427,500

(On specific portion for 9 months)

Jan 1,2019 1427129.25*10.87%*9/12 116,346.71

(On general portion for 9 months)

Jan 31,2019 342000*10.87%*8/12 24,783.60

Apr 30,2019 675000*10.87%*5/12 30,571.88

Aug 31,2019 972,000*10.87%*1/12 8804.70

427,500 180,506.89 608,006.89

Interest Expense	2018($)	2019($)
[(3800000*15%)+(4000000*8%)+(6000000*10%)	1,490,000
[1490000-608006.89]ie, interest capitalized should be deducted		881993.11