Question

On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used...

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

$

1,000,000

March 1, 2021

600,000

June 30, 2021

800,000

October 1, 2021

600,000

January 31, 2022

270,000

April 30, 2022

585,000

August 31, 2022

900,000

On January 1, 2021, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2021 and 2022. 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 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?
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Answer #1

Solution 1:

Year 2021: Weighted-Average accumulated expenditure and interest capitalized
Date Amount Capitalization period Weighted Average Accumulated Expenditures
1-Jan-21 $1,000,000 12/12 $1,000,000
1-Mar-21 $600,000 10/12 $500,000
30-Jun-21 $800,000 6/12 $400,000
1-Oct-21 $600,000 3/12 $150,000
Total $3,000,000 $2,050,000
*Interest rate 10%
Interest capitalized in 2021 $205,000
Year 2022: Weighted-Average accumulated expenditure
Date Amount Capitalization period Weighted Average Accumulated Expenditures
1-Jan-22 $3,205,000 9/9 $3,205,000
31-Jan-22 $270,000 8/9 $240,000
30-Apr-22 $585,000 5/9 $325,000
31-Aug-22 $900,000 1/9 $100,000
Total $4,960,000 $3,870,000
Weighted average interest rate of all other debt
Debt Amount Interest rate Interest amount
6% Note $4,000,000 6% $240,000
8% Note $6,000,000 8% $480,000
Totals $10,000,000 $720,000
Weighted average rate (total interets/ total debt) 7.20%
Year 2022: Interest Capitalized
Debt Amount
3000000*10%*9/12 = $225,000
(3870000- 3000000)*7.20%*9/12 = $46,980
Total interest capitalized in 2022 $271,980

Solution 2:

Computation of Cost of Building
Total expenditure before capitalization(4960000-205000) $4,755,000
Add: Interest capitalized in 2021 $205,000
Add: Interest capitalized in 2022 $271,980
Total cost of Building $5,231,980
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