Question

January 1, 2018 March 1, 2018 June 30, 2018 October 1, 2018 January 31, 2019 April 30, 2019 August 31, 2019 $1,000,000 600,000 800,000 600,000 270,000 585,000 900,000 On January 1, 2018, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2018 and 2019. The company's other interest-bearing debt included two long-term notes of $4,000,000 and $6,000,000 with interest rates of 6% and 8%, 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. Required: 1. Calculate the amount of interest that Mason should capitalize in 2018 and 2019 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 2018 and 2019 income statements.

Answer 1

1. Calculate the amount of interest that Mason should capitalize in 2018 and 2019 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.
a)
Expenditures for 2018:
1-Jan-18	1,000,000	12/12	1000000
1-Mar-18	600,000	10/12	500000
30-Jun-18	800,000	6/12	400000
1-Oct-18	600,000	3/12	150000
Accumulated expenditures (before interest)	3,000,000
Average accumulated expenditures			$        2,050,000.00
Interest capitalized 2018 = $2,050,000 x 10%	$          205,000.00
Expenditures for 2019
1-Jan-19	$       3,205,000.00	9/9	$        3,205,000.00
31-Jan-19	270,000	8/9	$           240,000.00
30-Apr-19	585,000	5/9	$           325,000.00
31-Aug-19	900,000	1/9	$           100,000.00
Accumulated expenditures (before interest)	4,960,000
Average accumulated expenditures			$        3,870,000.00
Weighted-average rate of all debt  year 2019
Long Term Notes	$       4,000,000.00	6%	$           240,000.00
Long Term Notes	$       6,000,000.00	8%	$           480,000.00
	$     10,000,000.00		$           720,000.00
Weighted-average rate of all debt = $720,000/10,000,000	7.20%
Interest capitalized
$3,000,000 x 10.0% x 9/12	$          225,000.00
870,000 x 7.2% x 9/12 =	$            46,980.00
Interest Capitalized in 2019	$          271,980.00
2)
Cost of Building
Expenditures in 2018	$       3,000,000.00
Interest Capitalized in 2018	$          205,000.00
Expenditures in 2019	$       1,755,000.00
Interest Capitalized in 2019	$          271,980.00
Total cost of building	$       5,231,980.00
3)
		Interest Rate	Interest
Loan	$       3,000,000.00	10%	$           300,000.00
Long Term Notes	$       4,000,000.00	6%	$           240,000.00
Long Term Notes	$       6,000,000.00	8%	$           480,000.00
Total interest incurred			$        1,020,000.00
Less: Interest capitalized 2018 = $2,050,000 x 10%			$         (205,000.00)
Interest Expenses 2018			$           815,000.00
		Interest Rate	Interest
Loan	$       3,000,000.00	10%	$           300,000.00
Long Term Notes	$       4,000,000.00	6%	$           240,000.00
Long Term Notes	$       6,000,000.00	8%	$           480,000.00
Total interest incurred			$        1,020,000.00
Less: Interest capitalized 2019			$         (271,980.00)
Interest Expenses 2019			$           748,020.00

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.
Req 1
	2018	2019
Interest capitalized	$                             160,846.15	$         225,136.33
Interest expense	$                             859,153.85	$         794,863.67
Weighted-average rate of all debt  year 2018		Interest Rate	Interest
Loan	$                          3,000,000.00	10%	$               300,000.00
Long Term Notes	$                          4,000,000.00	6%	$               240,000.00
Long Term Notes	$                          6,000,000.00	8%	$               480,000.00
	$                        13,000,000.00		$            1,020,000.00
Weighted-average rate of all debt = $1,020,000/13,000,000	7.85%
Expenditures for 2018:
1-Jan-18	1,000,000	12/12	1000000
1-Mar-18	600,000	10/12	500000
30-Jun-18	800,000	6/12	400000
1-Oct-18	600,000	3/12	150000
Accumulated expenditures (before interest)	3,000,000
Average accumulated expenditures			$            2,050,000.00
Interest capitalized 2018 = $2,050,000 x 7.85%	$                             160,846.15
Interest Expenses 2018 = $1,020,000 - $160,846.15	$                             859,153.85
Expenditures for 2019
1-Jan-19	$                          3,160,846.15	9/9	$            3,160,846.15
31-Jan-19	270,000	8/9	$               240,000.00
30-Apr-19	585,000	5/9	$               325,000.00
31-Aug-19	900,000	1/9	$               100,000.00
Accumulated expenditures (before interest)	4,915,846
Average accumulated expenditures			$            3,825,846.15
Interest capitalized 2019 = $3,825,846.15 x 7.85% x 9/12	$                             225,136.33
Interest Expenses 2019 = $1,020,000 - 225,136.33	$                             794,863.67
2)
Cost of Building
Expenditures in 2018	$                          3,000,000.00
Interest Capitalized in 2018	$                             160,846.15
Expenditures in 2019	$                          1,755,000.00
Interest Capitalized in 2019	$                             225,136.33
Total cost of building	$                          5,140,982.49
3)	2018	2019
Interest expense (calculated above)	$                             859,153.85	$         794,863.67