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 $1,170,000 840,000 1,040,000 840,000 306,000 639,000 900,000 On January 1, 2021, the company obtained a $3,000,000 construction loan with a 15% interest rate. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $3,000,000 and $9,000,000 with interest rates of 9% and 13%, 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.

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Answer 1

ANSWER:

As per the given Question

Working Notes

Calculation of Interest Amount
Year	Particulars	Loan Amount ($)	Rate of Interest ($)	Years	Interest Amount ($)
2021	Capitalisation of Interest on Construction Loan	3,000,000	15%	1.00	450,000
2022		3,000,000	15%	0.75	337,500
	Interest Expense
2021	On construction Loan				0
	On Lolg term Note 1	3,000,000	9%	1.00	270,000
	On Lolg term Note 1	9,000,000	13%	1.00	1,170,000
					1,440,000
2022	On construction Loan	3,000,000	15%	0.25	112,500
	On Lolg term Note 1	3,000,000	9%	1.00	270,000
	On Lolg term Note 1	9,000,000	13%	1.00	1,170,000
					1,552,500

Total Cost of Building Cost = Total expenditure on the project + Interest capitalization

Total Expenditure on the project = 1,170,000+840,000+1,040,000+840,000+306,000+639,000+900,000

= 5,735,000

Interest Capitalization = 450,000+337,500

= 787,500

Therefore Total Building Cost = 5,735,000 + 787,500

=6,522,500

Required Information are as follows

Particular	2021	2022
Interest Capitalized in ($)	450,000	337,500
Interest Expense in ($)	1,440,000	1,552,500

Total Cost of Building

$ 6,522,500

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