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 $1,170,000 840,000 1,040,000 840,000 306,000 639,000 900,000 On January 1, 2021, the company obtained a $3,000,000 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 $3,000,000 and $9.000.000 with interest rates of 9% 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.

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Answer 1

No of Months Average 12 1 2 Date 3 January 1, 2021 4 March 1, 2021 5 June 30, 2021 6 October 1, 2021 7 Total 8 Interest capitalized Amount 11,70,000 8,40,000 10,40,000 8,40,000 38,90,000 10 6 3 CU, 2021 11,70,000 7,00,000 5,20,000 2.10.000 26,00,000 ,90,000 1 3 9 Time period 10 Expenditures for 2022: Amount 11 January 1, 2022 42.80,000 12 January 31, 2022 3,33,000 13 April 30, 2022 6,66,000 14 August 31, 2022 9,63,000 15 Total 62,42,000 - 5 32,10,000 2.22.000 2,77,500 80,250 37,89,750 16 17 Weighted average interest rate: 18 Interest Amount Interest 19 9% 30,00,000 2,70,000 20 13% 90,00,000 11,70,000 21 Total 1,20,00,000 14,40,000 22 23 Weighted average interest rate 12.00% 24 25 Particulars Amount Interest Interest for 9 Months 26 Construction Loan 30,00,000 15% 3,37,500 27 Long term notes 7,89,750 12% 71,078 28 Total 37,89,750 4,08,578 29 30 31 Particulars 2,021 2,022 32 Interest capitalized 3,90,000 4,52,655 33 Interest Expenses 15,00,000 14,37,345 34 Cost of Building 66,50,578 35 26

B D A 1 2 Date 3 January 1, 2021 4 March 1, 2021 5 June 30, 2021 6 October 1, 2021 7 Total 8 Interest capitalized No of Months 12 10 Amount 1170000 840000 1040000 840000 =SUM(B3:36) Average 1=+(B3*C3)12 =+(B4*C4)/12 =+(B5*C5/12 =+(B6*C6)/12 =SUM(D3:D6) =+D7*15% 9 Time period 10 Expenditures for 2022: Amount 11 January 1, 2022 =+B7+D8 12 January 31, 2022 333000 13 April 30, 2022 666000 14 August 31, 2022 963000 15 Total =SUM(B11:B14) Average =+(B11'C11/12 =+(B12*C12712 =+(B13*C13/12 =+(B14*C14)/12 =SUM(D11:014) 16 Weighted average interest rate: 18 Interest Amount Interest 19 0.09 3000000 =+B19*A19 20 0.13 9000000 =+B20*A20 21 Total =SUM(B19:B20) =SUM(C19:C20) 22 23 Weighted average interest rate =+C21/B21 24 25 Particulars 26 Construction Loan 27 Long term notes 28 Total Amount 3000000 =+D15-B26 =SUM(B26:B27) Interest 0.15 =+C23 Interest for 9 Months =+B26*C26*9/12 =+B27*C27*9/12 =SUM(D26:D27) 29 30 31 Particulars 32 Interest capitalized 33 Interest Expenses 34 Cost of Building 35 36 2021 2022 390000 452655 I=3000000*15%-B32+C21 =(3000000*15%)-C32+C21 =+B7+D8+D28+B15-B11