Question

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 March 1, 2021 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022 $1,420,000 1,140,000 1,340,000 1,140,000 351,000 684,000 981,000 On January 1, 2021, the company obtained a $3,900,000 construction loan with a 12% Interest rate. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $6,000,000 and $9,000,000 with interest rates of 8% and 10%, 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: 1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 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 2021 and 2022 income statements. Answer is complete but not entirely correct. answer Complete this question by entering your answers in the tabs below. Req 1 and 3 Reg 2

Answer 1

Part 1 Specific interest method calculation of average accumulated expenditure-2021 weight weighted expenditure C-b/12 a*c capitalisation period date expenditure b а 1,420,000 Jan 1,2021 12 1.00 1,420,000 Mar 1,2021 950,000 1,140,000 10 0.83 Jun 30,2021 1,340,000 6 0.50 670,000 Oct 1,2021 1,140,000 0.25 285,000 5,040,000 3,325,000 Interest capit ali ze d in 2021 399,000 (3325000*12%) calculation of average accumulated expenditure-2022 weight c=b/9 weighted expend iture date expenditure capitalisation period b а*с а Jan 1,2022 (5040000+399000) 5,439,000 5,439,000 1.00 Jan 31,2022 312,000 351,000 8 0.89 684,000 Apr 30,2022 5 0.56 380,000 981,000 7,455,000 Aug 31,2022 1 0.11 109,000 6,240,000 Weighted-average rate of all other debt borrowing Interest rate Interest amount 6,000,000 8% 480,000 10% 9,000,000 15,000,000 900,000 1,380,000 Weighted-average rate of all other debt: 9.20% (1380000/15000000) Interest capitalized in 2022 (3900000*9%*9/12) 351,000 (6240000-3900000)*9.2%*9/12 161,460 Interest capitali zed in 2022 512,460

Part 2: Expenditures in 2021 5,040,000 Interest capitalized in 2021 399,000 Expenditures in 2022 (351000+684000+981000) 2,016,000 Interest capitalized in 2022 512,460 Total cost of building 7,967,460 Part 3: calculation of Interest Expense 2,021 2,022 Total interest incurred (5000000*9%) 468,000 468,000 (6000000 8%) 480,000 480,000 (9000000*10%) 900,000 900,000 Total interest incurred 1,848,000 1,848,000 Less: Interest Capitalized 399,000 512,460 Interest Expens e 1,449,000 1,335,540