Question

On January 1, 2021, the company obtained a $3 million loan with a 12% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 $ 1,200,000 March 1, 2021 690,000 June 30, 2021 450,000 October 1, 2021 660,000 January 31, 2022 945,000 April 30, 2022 1,260,000 August 31, 2022 2,250,000 On January 1, 2021, the company obtained a $3 million construction loan with a 12% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $5,500,000 and $7,500,000 with interest rates of 7% and 9%, 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.

Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method, and calculate the amount of interest expense that will appear in the 2021 and 2022 income statements.

Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method and interest expense that will appear in the 2021 and 2022 income statements. ("Round "Weighted-average rate of all debt" to 2 decimal places but do not round other intermediate calculations. Round your answers to the nearest whole dollar.)

	2021 2022 Interest capitalized Interest expense

Answer 1

Solution

	2021	2022
Interest capitalized	$192,144	$328,828.632
Interest Expenses
$1420000 - $192144	$1,227,856
$1420000 - $328828.632		$1,091,171.368

Expenditure for 2021
	Expenditure	Number of months	Expenses in $
01-Jan-21	1200000	12/12	1200000
01-Mar-21	690000	10/12	575000
30-Jun-21	450000	6/12	225000
01-Oct-21	660000	3/12	165000
TOTAL			2165000
Interest to be capitalized = $2165000 x 8.88% = $192252
Expenditure for 2022
	Expenditure	Number of months	Expenses in $
01-Jan-22	3192252	9/9	3192252
31-Jan-22	945000	8/9	840000
30-Apr-22	1260000	5/9	700000
31-Aug-22	2250000	1/9	250000
TOTAL			4982252
Interest to be capitalized = $4982252 x 8.88% x 9/12 = $328828.632