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 $1,070,e00 840,000 380, e00 Dok nt 710,000 1,170,000 1,485,000 2,700,e0e nces On January 1, 2018, the company obtained a $3 million construction loan with a 14 % interest rate. The loan was outstanding all of 2018 and 2019. The company's other interest-bearing debt included two long-term notes of $6,000,000 and $8,000,000 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. Assume the $3 million loan is not specifically tied to construction of the building. 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.

help please

Answer 1

1)

Expenditures for 2018
Jan-01	1,070,000.00	x	12/12	=	1,070,000.00
Mar-01	840,000.00	x	10/12	=	700,000.00
Jun-01	380,000.00	x	6/12	=	190,000.00
Oct-01	710,000.00	x	3/12	=	177,500.00
Accumulated expenditures (before interest)	3,000,000.00
Average accumulated expenditures					2,137,500.00

Interest Capitalized for 2018 = 2,137,500 x 14% = 299,250

Expenditures for 2019
Jan-01	3,299,250.00	x	9/9	=	3,299,250.00
Jan-31	1,170,000.00	x	8/9	=	1,040,000.00
Apr-30	1,485,000.00	x	5/9	=	825,000.00
Aug-31	2,700,000.00	x	1/9	=	300,000.00
Accumulated expenditures (before interest)	8,654,250.00
Average accumulated expenditures					5,464,250.00

Weighted-average rate of all other debt:

6,000,000 x 8% =480,000

8,000,000 x 10% = 800,000

Weightage Average Rate= 1,280,000/14,000,000

=9.14%

Interest capitalized:

3,000,000 x 14% x 9/12 = 315,000

2,464,250 x 9.14% x 9/12 = 168,977

Total =  483,977

2)

Cost of Building:
Expenditures in 2018	3,000,000.00
Interest capitalized in 2018	299,250.00
Expenditures in 2019	5,355,000.00
Interest capitalized in 2012	483,977.00
Total cost of building	9,138,227.00

3)

Interest Expense for 2018 :
3,000,000 x 14%	420,000.00
6,000,000 x 8%	480,000.00
8,000,000 x 10%	800,000.00
Total interest incurred	1,700,000.00
Less: Capitalized	299,250.00
Interest Expense	1,400,750.00

Interest Expense for 2019 :
Total interest incurred	1,700,000.00
Less: Capitalized	483,977.00
Interest Expense	1,216,023.00