Question

On January 1, 2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2017.

Expenditures on the project were as follows:

January 1, 2016 $ 1,000,000

March 1, 2016 600,000

June 30, 2016 800,000

October 1, 2016 600,000

January 31, 2017 270,000

April 30, 2017 585,000

August 31, 2017 900,000

On January 1, 2016, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2016 and 2017. 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 2016 and 2017. Interest is paid annually on all debt. The company’s fiscal year-end is December 31.

Assume the $3 million loan is not specifically tied to construction of the building.

Required:

1.	Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the weighted-average method. (Do not round your intermediate calculations. Round your answers to the nearest whole dollars.)

        

2.	What is the total cost of the building? (Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

        

3.	Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements. (Do not round your intermediate calculations. Round your answers to the nearest whole dollars.)

      

Answer 1

Part 1: weighted avg method date Jan 1, 2016 Mar 1,2016 Jun 30, 2016 Oct 1,2016 calculation of average accumulated expenditure-2016 expenditure capitalisation period weight weighted expenditure c=b/12 a*c 1000000 12 1.00 1000000 600000 10 0.83 500000 800000 6 0.50 400000 600000 3 0.25 150000 3000000 2050000 Weighted average rate of all debt: borrowing Interest rate Interest amount 3000000 10% 300000 4000000 6% 240000 6000000 8% 480000 13000000 1020000 7.85% Weighted average rate of all debt: (1020000/1300000) 160925 Interest capitalized in 2016 (2050000*7.85%)

calculation of average accumulated expenditure-2017 date expenditure capitalisation period weight weighted expenditure b c=b/9 ac Jan 1,2017 (3000000+160925) 3160925 9 1.00 3160925 Jan 31,2017 270000 8 0.89 240000 Apr 30,2017 585000 5 0.56 325000 Aug 31, 2017 900000 10.11 100000 4915925 3825925 225,251 Interest capitalized in 2017 (3825925*7.85%*9/12) Part 2: Expenditures in 2016 Interest capitalized in 2016 Expenditures in 2017 (270000+585000+900000) Interest capitalized in 2017 Total cost of building 3000000 160925 1755000 225,251 5,141,176 Part 3: calculation of Interest Expense Total interest incurred Less: Interest Capitalized 2016 1020000 160925 859075 2017 1020000 225,251 794,749 Interest Expense