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 March 1, 2021 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022 $1.850,000 1.500.000 1,700,000 1.500.000 405,000 738.000 1,035,000 On January 1, 2021, the company obtained a $4,500,000 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 $6,000,000 and $9.000.000 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 Complete this question by entering your answers in the tabs below. Req 1 pind 3 Reg 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.) 2022 Interest capitalized $ 2021 519,000 $ 598,6585 598,656 283,316 Interest expense

Answer 1

1) Interest costs-

Loan borrowed for construction - 4500000 @ 12%

Interest for the year 2021 - 540000

Interest for the year 2022 - 540000

Interest on Long term Loans -

- 6000000 @ 8% - 480000

- 9000000 @ 10% - 900000

Average rate of borrowing on non specific borrowing -

(480000 + 900000)/15000000 = 9.20%

Total Interest Cost -

2021 - 1920000

2022 - 1920000

1) Specific Interest to be capitalised -

2021 - 540000

2022 - 360000 (only upto August)

Irrespective of whether specific borrowed funds are used or not interest shall be capitalised in totality till the date of completion of construction.

2)

Date	Particulars	Amount	Accumulated Borrowing	Amount of Non Specific Borrowing	Interest on Non specific borrowing
Jan.1, 2021	Amount Borrowed	1850000	1850000	0
Mar.1, 2021	Amount Borrowed	1500000	3350000	0
Jun.30, 2021	Amount Borrowed	1700000	5050000	550000	550000*9.20%*3/12 =12650
Oct.1, 2021	Amount Borrowed	1500000	6550000	2050000	2050000*9.20%*4/12=62866.66 Out of this 47150 to be capitalised in the year 2021 balance to be capitalised in the year 2022
Jan.31, 2022	Amount Borrowed	405000	6955000	2455000	2455000*9.20%*3/12 = 56350
Apr.30, 2022	Amount Borrowed	738000	7693000	3193000	3193000*9.20%*4/12=97918.66
Aug.31, 2022	Amount Borrowed	1035000	8728000	4228000	4228000*9.20%*1/12=32414.67

1) Interest to be capitalised in

2021- 540000 + 12650+ 47150 = 599800

2022- 540000*9/12+15716.66+56350+97918.66+32414.67 = 607400

2) Cost of building shall be -

All cost of construction plus amount of interest capitalised

= 1850000+1500000+1700000+1500000+405000+738000+1035000+599800 (Interest) +607400 (Interest)

= 9935200

3) Amount of Interest debited to Income and expenditure statement -

2021 - 1920000 - 599800 (Interest capitalised) = 1320200

2022 - 1920000 - 607400 (Interest capitalised) = 1312600.