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 $ 1,350,000

March 1, 2021 1,080,000

June 30, 2021 1,280,000

October 1, 2021 1,080,000

January 31, 2022 342,000

April 30, 2022 $675,000

August 31, 2022 $972,000

On January 1, 2021, the company obtained a $3,800,000 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 8% and 10%, 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.

Check my work 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: points January 1, 2021 March 1, 2021 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022 $1,350,000 1,080,000 1,280,000 1,080,000 342,000 675,000 972,000 eBook Print On January 1, 2021, the company obtained a $3,800,000 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 8% and 10%, 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. References 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. 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 2021 and 2022 using the specific interest method and interest expense that will appear in the 2021 and 2022 income statements. (Do not round intermediate calculations.) Interest capitalized Interest expense $ S 2021 474,000 1,016,000 S S 2022 582,819 907,181 Reg 1 and 3 Req2 >

Answer 1

1 & 3)For 2021:

Actual Interest cost:

Amount of Loan	Interest rate	=	Amount of loan *interest rate
3800000	15%		570000
4000000	8%		320000
6000000	10%		600000
13800000			1490000

Calculation of weighted average accumulated expenditure during the year 2021:

Date	Amount	period of outstanding	weighted average accumulated expenditure
1Jan	1350000	12/12	1350000
1Mar	1080000	10/12	900000
30June	1280000	6/12	640000
1October	1080000	3/12	270000
weighted average accumulated expenditure			3160000

since weighted average accumulated expenditure Is less than construction loan taken ,so there is no need to calculate weighted average interest rate on common debt outstanding.

Interest to capitalize= weighted average accumulated expenditure *interest rate on specific loan

                         = 3,160,000* 15%

                         = $ 474,000

Interest expense = Total interest cost -Interest capitalized

                  = 1490000-474000

                   = 1016000

For year 2022

Accumulated cost at beginning (incurred till 2021 including capitalized interest)= 1350000+1080000+1280000+1080000+474000 = 5264000

Calculation of weighted average accumulated expenditure:

Date	Amount	period of outstanding	weighted average accumulated expenditure
Beginning	5264000	12/12	5264000
31Jan	342000	11/12	313500
30Apr	675000	8/12	450000
31Aug	972000	4/12	324000
weighted average accumulated expenditure			6351500
Out of this ,it is financed as
Construction loan			3800000 at 15%
other loan			2551500 at weighted average interest rate

Calculation of weighted average interest rate:

Amount of Loan	Interest rate	=	Amount of loan *interest rate
4000000	8%		320000
6000000	10%		600000
10000000			920000

weighted average interest rate= 920000/10000000 = 9.2%

Calculation of capitalized interest :

weighted average expenditure	*	Interest rate	=	Interest to be capitalized
3800000		15%		570000
2551500		9.2%		234738
Total interest to be capitalized				804738

Interest expense = 1490000 -804738 = 685262

2)

Total cost of Building= Total cost incurred +capitalized interest

                  =[1350000+1080000+1280000+1080000+342000+675000+972000]+[474000+804738]

                   = 6779000+ 1278738

                      = 8057738