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: $1,e9e, eee 780,000 98e, eee 780,eee 297,eee 630,eee 927,e00 January 1, 2021 March 1, 2021 June 30, 2021 October 1, 28e21 January 31, 2022 April 30, 2822 August 31, 2022 es On January 1, 2021, the company obtained a $3,300,000 construction loan with a 16 % interest rate. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $2,000,000 and $8,000,000 with interest rates of 10% and 12 % , 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. Complete this auestion bv enterina vour answers in the tabs below.

Answer 1

Summary of Answer
Answer 1	Interest capitalized in 2021			$       388,000
Answer 1	Interest capitalized in 2022			$       520,845
Answer 2	Total cost of the building			$   6,392,845
Answer 3	Interest expense in 2021			$   1,300,000
Answer 3	Interest expense in 2022			$   1,167,155

Calculation

Expenditure for 2021
Expenditure for 2021	Amount	Time factor	Weighted Amount
01-Jan-21	1,090,000	12/12	1,090,000
01-Mar-21	780,000	10/12	650,000
30-Jun-21	980,000	6/12	490,000
01-Oct-21	780,000	3/12	195,000
Accumulated capital Expenditure before interest capitalized	3,630,000
Average Accumulated capital Expenditure			2,425,000
Interest capitalized in 2021
Average Accumulated capital Expenditure	Multiplied by: interest rate	Interest capitalized in 2021
2,425,000	16.00%	388,000
Total capitalized value in 2021	3,630,000	388,000	4,018,000
Expenditure for 2022
Expenditure for 2022	Amount	Time factor
01-Jan-22	4,018,000	9/9	4,018,000
31-Jan-22	297,000	8/9	264,000
30-Apr-22	630,000	5/9	350,000
31-Aug-22	927,000	1/9	103,000
Accumulated capital Expenditure before interest capitalized	5,872,000
Average accumulated capital Expenditure			4,735,000
Weighted average rate for other debt
2,000,000	10.00%	200,000
8,000,000	12.00%	960,000
10,000,000		1,160,000
Weighted average rate for other debt (Total interest/Total loan )	1,160,000	10,000,000	11.60%
Interest capitalized in 2022
For construction loan	3,300,000	16.00%	528,000
Other debt (4735000-3300000)	1,435,000	11.60%	166,460
Interest for annual			694,460
Interest capitalized in 2022 (694460* 9/12)			520,845
Interest expense charged to income statement
Construction loan	3,300,000	16.00%	528,000
Other debt 1	2,000,000	10.00%	200,000
Other debt 2	8,000,000	12.00%	960,000
Total interest paid			1,688,000
Interest expense charged to income statement
Year		2021	2022
Total interest paid		1,688,000	1,688,000
Less: interest capitalized		388,000	520,845
Interest expense charged to income statement		1,300,000	1,167,155
Total cost of the building
Expenditure in 2021			3,630,000
Interest capitalized in 2021			388,000
Expenditure in 2022			1,854,000
Interest capitalized in 2022			520,845
Total cost of the building			6,392,845