Question

On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021	$	1,040,000
March 1, 2021		810,000
June 30, 2021		450,000
October 1, 2021		700,000
January 31, 2022		1,125,000
April 30, 2022		1,440,000
August 31, 2022		2,610,000

On January 1, 2021, the company obtained a $3 million construction loan with a 10% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $5,900,000 and $7,900,000 with interest rates of 7% and 9%, 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 weighted-average 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.

Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method and interest expense that will appear in the 2021 and 2022 income statements. ("Round "Weighted-average rate of all debt" to 2 decimal places but do not round other intermediate calculations. Round your answers to the nearest whole dollar.)

	2021 2022 Interest capitalized Interest expense

What is the total cost of the building? ("Round "Weighted-average rate of all debt" to 2 decimal places but do not round other intermediate calculations. Round your answer to the nearest whole dollar.)

	Total cost of building

• Req 1 and 3

Answer 1

Req 1
	2021	2022
Interest capitalized	$           179,271.43	$    334,975.11
Interest expense	$        1,244,728.57	$ 1,089,024.89
Weighted-average rate of all debt  year 2021		Interest Rate	Interest
Loan	$        3,000,000.00	10%	$    300,000.00
Long Term Notes	$        5,900,000.00	7%	$    413,000.00
Long Term Notes	$        7,900,000.00	9%	$    711,000.00
	$      16,800,000.00		$ 1,424,000.00
Weighted-average rate of all debt = $1,424,000/16,800,000	8.48%
Expenditures for 2021:
1-Jan-21	1,040,000	12/12	1040000
1-Mar-21	810,000	10/12	675000
30-Jun-21	450,000	6/12	225000
1-Oct-21	700,000	3/12	175000
Accumulated expenditures (before interest)	3,000,000
Average accumulated expenditures			$ 2,115,000.00
Interest capitalized 2021 = $2,115,000 x 8.48%	$           179,271.43
Interest Expenses 2021 = $1,424,000 - $179,271.43	$        1,244,728.57
Weighted-average rate of all debt  year 2022
Expenditures for 2022
1-Jan-22	$        3,179,271.43	9/9	$ 3,179,271.43
31-Jan-22	1,125,000	8/9	$ 1,000,000.00
30-Apr-22	1,440,000	5/9	$    800,000.00
31-Aug-22	2,610,000	1/9	$    290,000.00
Accumulated expenditures (before interest)	8,354,271
Average accumulated expenditures			$ 5,269,271.43
Interest capitalized 2022 = $5,269,271.43 x 8.48% x 9/12	$           334,975.11
Interest Expenses 2022 = $1,424,000 - 334,975.11	$        1,089,024.89
2)
Cost of Building
Expenditures in 2021	$        3,000,000.00
Interest Capitalized in 2021	$           179,271.43
Expenditures in 2022	$        5,175,000.00
Interest Capitalized in 2022	$           334,975.11
Total cost of building	$        8,689,246.54
3)	2021	2022
Interest expense (calculated above)	$        1,244,728.57	$ 1,089,024.89