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:
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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