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	$	1,310,000
March 1, 2021		1,020,000
June 30, 2021		1,220,000
October 1, 2021		1,020,000
January 31, 2022		333,000
April 30, 2022		666,000
August 31, 2022		963,000

On January 1, 2021, the company obtained a $3,700,000 construction loan with a 12% 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 $7,000,000 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.

Answer 1

Solution 1:

Solution 1: Year 2021: Weighted-Average accumulated expenditure and interest capitalized Capitalization Weighted Average Date Amount period Accumulated Expenditures 01 January 2021 $1,310,000 12/12 $1,310,000 01 March 2021 $1,020,000 10/12 $850,000 30 June 2021 $1,220,000 6/12 $610,000 01 October 2021 $1,020,000 3/12 $255,000 Total $4,570,000 $3,025,000 *Interest rate 12% Interest capitalized in 2021 $363,000 Year 2022: Weighted-Average accumulated expenditure Date Capitalization Weighted Average Amount period Accumulated Expenditures 01 January 2022 $4,933,000 9/9 $4,933,000 31 January 2022 $333,000 8/9 $296,000 30 April 2022 $666,000 5/9 $370,000 31 August 2022 $963,000 1/9 $107,000 $6,895,000 $5,706,000 Total Weighted average interest rate of all other debt Debt Amount | Interest rate Interest amount 8% Note $3,000,000 8% $240,000 10% Note $7,000,000 10% $700,000 Totals $10,000,000 $940,000 Weighted average rate (total interets/ total debt) 9.40% Year 2022: Interest Capitalized Debt 3700000*12%*9/12 = |(5706000- 3700000)*9.40%*9/12 = Amount $333,000 $141,423 42 Total interest capitalized in 2022 $474,423 43 44 45 et209 ) Sheet210 Sheet211 ) Sheet264 Sheet265

Solution 2 and 3:

Solution 2: Computation of Cost of Building Total expenditure before capitalization(6895000-363000) Add: Inerest capitalized in 2021 Add: Inerest capitalized in 2022 Total cost of Building $6,532,000 $363,000 $474,423 $7,369,423 52 Solution 3: Debt Construction Loan 8% Note 10% Note Total inerest incurred Computation of Interest expense Amount $3,700,000 $3,000,000 $7,000,000 Interest rate 12% 8% 10% Interest amount $444,000 $240,000 $700,000 $1,384,000 2022 $1,384 Total inerest incurred Less: Interest Capitalized Interest Expense 2021 $1,384,000 $363,000 $1,021,000 $1,384,000 $474,423 $909,577 et209 ) Sheet210 Sheet211 ) Sheet264 Sheet265