Question

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 600,000 800,000 June 30, 2018 October 1, 2018 600,000 270,000 January 31, 2019 April 30, 2019 585,000 August 31, 2019 900,000 On January 1, 2018, the company obtained a $3 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 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,

Answer 1

Specific Interest method:

Solution 1:
Year 2021: Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2021	$10,00,000	12/12	$10,00,000
01 March 2021	$6,00,000	10/12	$5,00,000
30 June 2021	$8,00,000	6/12	$4,00,000
01 October 2021	$6,00,000	3/12	$1,50,000
Total	$30,00,000		$20,50,000
*Interest rate			10%
Interest capitalized in 2021			$2,05,000
Year 2022: Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2022	$32,05,000	9/9	$32,05,000
31 January 2022	$2,70,000	8/9	$2,40,000
30 April 2022	$5,85,000	5/9	$3,25,000
31 August 2022	$9,00,000	1/9	$1,00,000
Total	$49,60,000		$38,70,000
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 2022: Interest Capitalized
Debt		Amount
3000000*10%*9/12 =		$2,25,000
(3870000- 3000000)*7.20%*9/12 =		$46,980
Total interest capitalized in 2022		$2,71,980

Solution 2:
Computation of Cost of Building
Total expenditure before capitalization(4960000-205000)	$47,55,000
Add: Interest capitalized in 2021	$2,05,000
Add: Interest capitalized in 2021	$2,71,980
Total cost of Building	$52,31,980
Solution 3:
Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Construction Loan	$30,00,000	10%	$3,00,000
6% Note	$40,00,000	6%	$2,40,000
8% Note	$60,00,000	8%	$4,80,000
Total interest incurred			$10,20,000
	2021	2022
Total inerest incurred	$10,20,000	$10,20,000
Less: Interest Capitalized	$2,05,000	$2,71,980
Interest Expense	$8,15,000	$7,48,020

Weighted Average Method:

Solution 1:
Year 2021: Weighted-Average accumulated expenditure and interest capitalized
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2021	$10,00,000	12/12	$10,00,000
01 March 2021	$6,00,000	10/12	$5,00,000
30 June 2021	$8,00,000	6/12	$4,00,000
01 October 2021	$6,00,000	3/12	$1,50,000
Total	$30,00,000		$20,50,000
*Interest rate			7.85%
Interest capitalized in 2021			$1,60,925
Year 2022: Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
01 January 2022	$31,60,925	9/9	$31,60,925
31 January 2022	$2,70,000	8/9	$2,40,000
30 April 2022	$5,85,000	5/9	$3,25,000
31 August 2022	$9,00,000	1/9	$1,00,000
Total	$49,15,925		$38,25,925
*Interest rate			7.85%
Interest capitalized in 2022			$2,25,251
Weighted average interest rate of all debt
Debt	Amount	Interest rate	Interest amount
Loan	$30,00,000	10%	$3,00,000
6% Note	$40,00,000	6%	$2,40,000
8% Note	$60,00,000	8%	$4,80,000
Totals	$1,30,00,000		$10,20,000
Weighted average rate (total interets/ total debt)		7.85%

Solution 2:
Computation of Cost of Building
Total expenditure before capitalization(4915925-160925)	$47,55,000
Add: Interest capitalized in 2021	$1,60,925
Add: Interest capitalized in 2022	$2,25,251
Total cost of Building	$51,41,176
Solution 3:
Computation of Interest expense
Debt	Amount	Interest rate	Interest amount
Loan	$30,00,000	10%	$3,00,000
6% Note	$40,00,000	6%	$2,40,000
8% Note	$60,00,000	8%	$4,80,000
Total interest incurred			$10,20,000
	2021	2022
Total inerest incurred	$10,20,000	$10,20,000
Less: Interest Capitalized	$1,60,925	$2,25,251
Interest Expense	$8,59,075	$7,94,749