Question

Problem 10-9 (Static) Interest capitalization; specific interest method [LO10-7]

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	$	1,000,000
March 1, 2021		600,000
June 30, 2021		800,000
October 1, 2021		600,000
January 31, 2022		270,000
April 30, 2022		585,000
August 31, 2022		900,000

On January 1, 2021, the company obtained a $3 million construction loan with a 10% 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 6% and 8%, 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.

Req 1 and 3 Req 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. Enter your answers in dollars.) 2022 2021 205,000 | $ Interest capitalized Interest expense

Answer 1

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		2021	2022
	Interest Capitalized	$               2,05,000	$         2,71,980
	Interest Expense	$               8,15,000	$         7,48,020
	Cost of Building	=	$       52,31,980
	Workings:
	Expenditure for 2021
	Jan 1,2021	$            10,00,000	X	12/12	=	$        10,00,000
	March 1, 2021	$               6,00,000	X	10/12	=	$          5,00,000
	June 30, 2021	$               8,00,000	X	6/12	=	$          4,00,000
	October 1, 2021	$               6,00,000	X	3/12	=	$          1,50,000
		$            30,00,000				$        20,50,000
	Interest Capitalized in 2021
		$            20,50,000	X	10.00%	=	$          2,05,000
	Expenditure for 2022
	Jan 1, 2022 ($3000,000+$205,000)	$            32,05,000	X	9/9	=	$        32,05,000
	Jan 31, 2022	$               2,70,000	X	8/9	=	$          2,40,000
	April 30, 2022	$               5,85,000	X	5/9	=	$          3,25,000
	August 31. 2022	$               9,00,000	X	1/9	=	$          1,00,000
		$            49,60,000				$        38,70,000
	Interest Capitalized in 2019
	$                       38,70,000
Less:	$                       30,00,000	X	10.00%	X 9/12	=	$          2,25,000
	$                         8,70,000	X	7.20%	X 9/12	=	$              46,980
	Interest Capitalized in 2019				=	$          2,71,980
	Weighted Average rate of all debt:-
		$            40,00,000	X	6%	=	$          2,40,000
		$            60,00,000	X	8%	=	$          4,80,000
		$         1,00,00,000				$          7,20,000
		Weighted Average rate of all debt =				7.20%
		($720,000 / 100,00,000)
	Interest Expense for 2021:
	Total Interest Incurred	($3000000*10%)+($4000000*6%)+($6000000*8%)			=	$        10,20,000
	Less : Interest Capitalized				=	$          2,05,000
	2021 Expense				=	$          8,15,000
	Interest Expense for 2022:
	Total Interest Incurred				=	$        10,20,000
	Less : Interest Capitalized				=	$          2,71,980
	2022 Expense				=	$          7,48,020
	Cost of Building
	Expenditure for 2021				=	$        30,00,000
	Interest Capitalized in 2021				=	$          2,05,000
	Expenditure for 2022				=	$        17,55,000
	Interest Capitalized in 2022				=	$          2,71,980
	Cost of Building				=	$        52,31,980