Question

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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: points 8 03:03:29 January 1, 2018 March 1, 2018 June 30, 2018 October 1, 2018 January 31, 2019 April 30, 2019 August 31, 2019 $1,070,000 840,000 380,000 710,000 1,170,000 1.485.000 2,700,000 eBook Print References On January 1, 2018, the company obtained a $3 million construction loan with a 14% interest rate. The loan was outstanding all of 2018 and 2019. The company's other interest-bearing debt included two long-term notes of $6,000,000 and $8,000,000 with interest rates of 8% and 10%, 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. 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 2018 and 2019 using the weighted average 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. < Prev 2 of 3 !!! Next >

Answer 1

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	2018	2019
Interest Capitalized	$              2,13,750	$   4,03,406
Interest Expense	$            14,86,250	$ 12,96,594
Total cost of building	$            89,72,156
Workings:
Weighted Average rate of all debt:-
	$            30,00,000	X	14%	=	$          4,20,000
	$            60,00,000	X	8%	=	$          4,80,000
	$            80,00,000	X	10%	=	$          8,00,000
	$        1,70,00,000				$       17,00,000
	Weighted Average rate of all debt =				10.00%
	($1700000/ $17000000)
Expenditure for 2018
Jan 1,2018	$            10,70,000	X	12/12	=	$       10,70,000
March 1, 2018	$              8,40,000	X	10/12	=	$          7,00,000
June 30, 2018	$              3,80,000	X	6/12	=	$          1,90,000
October 1, 2018	$              7,10,000	X	3/12	=	$          1,77,500
	$            30,00,000				$       21,37,500
Interest Capitalized in 2018
	$            21,37,500	X	10.00%	=	$          2,13,750
Expenditure for 2019
Jan 1, 2019 ($3000000 + $213750)	$            32,13,750	X	9/9	=	$       32,13,750
Jan 31, 2019	$            11,70,000	X	8/9	=	$       10,40,000
April 30, 2019	$            14,85,000	X	5/9	=	$          8,25,000
August 31. 2019	$            27,00,000	X	1/9	=	$          3,00,000
	$            85,68,750				$       53,78,750
Interest Capitalized in 2019
$                      53,78,750	X	10.00%	X 9/12	=	$          4,03,406
Cost of Building
Expenditure for 2018				=	$       30,00,000
Interest Capitalized in 2018				=	$          2,13,750
Expenditure for 2019				=	$       53,55,000
Interest Capitalized in 2019				=	$          4,03,406
Total cost of building				=	$       89,72,156
Interest Expense for 2018:
Total Interest Incurred				=	$       17,00,000
Less : Interest Capitalized				=	$          2,13,750
2018 Expense				=	$       14,86,250
Interest Expense for 2019:
Total Interest Incurred				=	$       17,00,000
Less : Interest Capitalized				=	$          4,03,406
2019 Expense				=	$       12,96,594