Question

Class Discussion Exercise On January 1, 2018, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2019. Expenditures on the project were as follows: January 1, 2018 $1,000,000 March 1, 2018 600,000 June 30, 2018 800,000 October 1, 2018 600,000 January 31, 2019 270,000 585,000 April 30, 2019 August 31, 2019 900,000 On January 1, 2018, the company obtained a $2 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. 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.

please solve this problem as soon as possible. Thank you

Answer 1

Solution:

Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
6% Note	$40,00,000	6%	$2,40,000
8% Note	$60,00,000	8%	$4,80,000
Totals	$1,00,00,000		$7,20,000
Weighted average rate (total interets/ total debt)		7.20%

Year 2018: Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2018	$10,00,000	12/12	$10,00,000
01 March 2018	$6,00,000	10/12	$5,00,000
30 June 2018	$8,00,000	6/12	$4,00,000
01 October 2018	$6,00,000	3/12	$1,50,000
Total	$30,00,000		$20,50,000

Year 2018: Interest Capitalized
Debt		Amount
2000000*10% =		$2,00,000
(2050000- 2000000)*7.20%=		$3,600
Total interest capitalized in 2018		$2,03,600

Year 2019: Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2019	$32,03,600	9/9	$32,03,600
31 January 2019	$2,70,000	8/9	$2,40,000
30 April 2019	$5,85,000	5/9	$3,25,000
31 August 2019	$9,00,000	1/9	$1,00,000
Total	$49,58,600		$38,68,600

Year 2019: Interest Capitalized
Debt		Amount
2000000*10%*9/12 =		$1,50,000
(3868600- 2000000)*7.20%*9/12 =		$1,00,904
Total interest capitalized in 2019		$2,50,904

Solution 2:

Computation of Cost of Building
Total expenditure before capitalization(4755000-203600)	$47,55,000
Add: Interest capitalized in 2018	$2,03,600
Add: Interest capitalized in 2019	$2,50,904
Total cost of Building	$52,09,504
Solution 3:
Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$20,00,000	10%	$2,00,000
6% Note	$40,00,000	6%	$2,40,000
8% Note	$60,00,000	8%	$4,80,000
Total interest incurred			$9,20,000
	2018	2019
Total inerest incurred	$9,20,000	$9,20,000
Less: Interest Capitalized	$2,03,600	$2,50,904
Interest Expense	$7,16,400	$6,69,096