Question

Problem 10-9 Interest capitalization; specific interest method (LO10-7) 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 March 1, 2018 June 30, 2018 October 1, 2018 January 31, 2019 April 30, 2019 August 31, 2019 $1,870, cea 1,560, eee 1,760, Dee 1,558,888 414, eae 747, e 1,044,000 On January 1, 2018, the company obtained a $4,600,000 construction loan with a 159 interest rate The loan was outstanding all of 2018 and 2019. The company's other interest bearing debt included two long-term notes of $2,000,000 and $8,000,000 with interest rates of 8% and 12%, 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 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 2018 and 2019 income statements Complete this question by entering your answers in the tabs below. Reg 1 and 3 Calculate the amount of interest that Mason should capitalize in 2018 and 2019 using the specific interest me expense that will appear in the 2018 and 2019 income statements. (Enter your answers in dollars 2019 Interest capitalized Interest expense 2018 656 000 1,144,000 $ Reg 2 >

Answer 1

Solution 1:

Year 2018: Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Jan-18	$1,870,000	12/12	$1,870,000
1-Mar-18	$1,560,000	10/12	$1,300,000
30-Jun-18	$1,760,000	6/12	$880,000
1-Oct-18	$1,560,000	3/12	$390,000
Total	$6,750,000		$4,440,000
*Interest rate			15%
Interest capitalized in 2018			$666,000
Year 2019: Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Jan-19	$7,416,000	9/9	$7,416,000
31-Jan-19	$414,000	8/9	$368,000
30-Apr-19	$747,000	5/9	$415,000
31-Aug-19	$1,044,000	1/9	$116,000
Total	$9,621,000		$8,315,000
Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
8% Note	$2,000,000	8%	$160,000
12% Note	$8,000,000	12%	$960,000
Totals	$10,000,000		$1,120,000
Weighted average rate (total interets/ total debt)		11.20%
Year 2019: Interest Capitalized
Debt		Amount
4600000*15%*9/12 =		$517,500
(8315000- 4600000)*11.20%*9/12 =		$312,060
Total interest capitalized in 2019		$829,560

Solution 2:

Computation of Cost of Building
Total expenditure before capitalization(9621000-666000)	$8,955,000
Add: Interest capitalized in 2018	$666,000
Add: Interest capitalized in 2019	$829,560
Total cost of Building	$10,450,560

Solution 3:

Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$4,600,000	15%	$690,000
8% Note	$2,000,000	8%	$160,000
12% Note	$8,000,000	12%	$960,000
Total interest incurred			$1,810,000
	2018	2019
Total inerest incurred	$1,810,000	$1,810,000
Less: Interest Capitalized	$666,000	$829,560
Interest Expense	$1,144,000	$980,440