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	$	1,500,000
March 1, 2021		1,200,000
June 30, 2021		1,400,000
October 1, 2021		1,200,000
January 31, 2022		360,000
April 30, 2022		693,000
August 31, 2022		990,000

On January 1, 2021, the company obtained a $4,000,000 construction loan with a 14% interest rate. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $1,000,000 and $4,000,000 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.

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.)

	2021 2022 Interest capitalized Interest expense

What is the total cost of the building? (Do not round intermediate calculations.)

	Total cost of building

Answer 1

Capitalization period C =B/12 Average Accumulated Expenditures D = (AXC) Year 2021 Months outstanding from Date of Construction expenses Amount Paid the date of payment to made Dec 2021 January 01, 2021 1,500,000 12 months March 01, 2021 1,200,000 10 months June 30, 2021 1,400,000 6 months October 01, 2021 1,200,000 3 months Total 5,300,000 12/12 10/12 6/12 3/12 (1,500,000 x 12/12) (1,200,000 x 10/12) (1,400,000 x 6/12) (1,200,000 x 3/12) 1,500,000 1,000,000 700,000 300,000 3,500,000 Construction Loan interest rate 14% Interest to be capitalized (3,500,000 x 14%) 490,000 Interest rate [B] 14% Calculation of Interest expense Description Loan Amount [A] Construction Loan amount 4,000,000 10% Notes 1,000,000 12% Notes 4,000,000 Total Interest Less: Capitalized Interest Amount Interest Expense 10% 12% Interest Amount [ AB] $ 560,000 100,000 480,000 $ 1,140,000 (490,000) 650,000

In Year 2022 Beginning Expenditure cost (5,300,000 + 490,000) = 5,790,000 Calculation of weighted Average Accumulated Expenditure Months outstanding from Date of Construction expenses Capitalization Amount Incurred the date of payment to 30 made period C =B/9 September 2022 Average Accumulated Expenditures D= (AXC) 9/9 8/9 January 01, 2022 January 31, 2022 April 30, 2022 August 31, 2022 5,790,000 9 Months 360,000 8 Months 693,000 5 Months 990,000 1 Months 7,833,000 5/9 (5,790,000 x 9/9) (360,000 X 8/9) (693,000 x 5/9) (990,000 X 1/9) 5,790,000 320,000 385,000 110,000 6,605,000 1/9 Total Interest cost Weighted Average of All other debt Loan Amount [A] 10% Notes 12% Notes Interest % [B] 1,000,000 4,000,000 5,000,000 (580,000 / 5,000,000) 10% 12% [ AB] 100,000 480,000 580,000 11.60% Average interest rate

Calculation of Interest to be capitalized for 9 Months Total Average Accumulated Expenditures 6,605,000 Interest rate Amount [A] [B] Construction Loan Remaining Loan (6,605,000 - 4,000,000) Interest to be captialized 4,000,000 2,605,000 6,605,000 14.00% 11.60% Interest cost [ AB] x 9/12 $ 420,000 226,635 $ 646,635 Interest Expense Total Interest Less: Capitalized Interest Interest expense 1,140,000 (646,635) 493,365 2022 Interest capitalized Interest expense 2021 490,000 650,000 $ $ $ 646,635 493,365

2) Cost of Building 1,500,000 1,200,000 1,400,000 1,200,000 $ 5,300,000 490,000 Expenditures incurred in 2018 January 01, 2021 $ March 01, 2021 June 30, 2021 October 01, 2021 Add: Interest cost capitalized in 2018 Expenditures incurred in 2019 January 31, 2022 $ April 30, 2022 August 31, 2022 Add: Interest cost capitalized in 2019 Total Cost of Building 360,000 693,000 990,000 2,043,000 646,635 8,479,635 Total cost of Building $ 8,479,635