Question

On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 March 1, 2021 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022 $1,280,000 960,000 1,160,000 960,000 324,000 657,000 954,000 On January 1, 2021, the company obtained a $3,600,000 construction loan with a 15% interest rate. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $4,000,000 and $6,000,000 with interest rates of 11% and 13%, respectively. Both notes were outstanding during all of 2021 and 2022. 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 2021 and 2022 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 2021 and 2022 income statements.

Answer 1

Part 1: date Specific interest method calculation of average accumulated expenditure-2021 expenditure capitalisation period weight weighted expenditure I b c=b/12 | a*c 1,280,000 1.00 1,280,000 960,000 10 0.83 800,000 1,160,000 6 0.50 580,000 960,000 3 0.25 240,000 4,360,000 2,900,000 Jan 1,2021 Mar 1,2021 Jun 30, 2021 Oct 1,2021 12 435,000 Interest capitalized in 2021 (2900000*15%) date calculation of average accumulated expenditure-2022 expenditure capitalisation period weight weighted expenditure c=b/9 a*c 4,795,000 1.00 4,795,000 324,000 8 0.89 288,000 657,000 5 0.56 365,000 954,000 10.11 _ 106,000 6,730,000 5,554,000 Jan 1,2022 (4360000+435000) Jan 31,2022 Apr 30,2022 Aug 31,2022 ام | | | Weighted average rate of all other debt: borrowing 4,000,000 6,000,000 10,000,000 Interest rate 11% 13% Interest amount 440,000 780,000 1,220,000 12.20% Weighted average rate of all other debt: (1220000/10000000) Interest capitalized in 2022 (3600000*15%*9/12) (5554000-3600000)*12.2%*9/12 Interest capitalized in 2022 405,000 178,791 583,791

Part 2: Expenditures in 2021 Interest capitalized in 2021 Expenditures in 2022 (324000+657000+954000) Interest capitalized in 2022 Total cost of building 4,360,000 435,000 1,935,000 583,791 7,313,791 2,021 2,022 Part 3: calculation of Interest Expense Total interest incurred (3600000*15%) (4000000*11%) (6000000*13%) Total interest incurred Less: Interest Capitalized Interest Expense 540,000 440,000 780,000 1,760,000 435,000 1,325,000 540,000 440,000 780,000 1,760,000 583,791 1,176,209