Question

On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate.. 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 $1,000,000 600,000 800,000 600,000 270,000 585,000 900,000 On January 1, 2021, the company obtained a $3 million construction loan with a 10% 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 $4,000,000 and $6,000,000 with interest rates of 6% and 8%, 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 weighted average method. 2. What is the total cost of the building? Calculate the amount of interest expense that will appear in the 2021 and 2022 income statements.

Answer 1

	2018	2019
Interest Capitalized	$              1,60,925	$   2,25,251
Interest Expense	$              8,59,075	$   7,94,749
Total cost of building	$            51,41,176
Workings:
Weighted Average rate of all debt:-
	$            30,00,000	X	10%	=	$          3,00,000
	$            40,00,000	X	6%	=	$          2,40,000
	$            60,00,000	X	8%	=	$          4,80,000
	$        1,30,00,000				$       10,20,000
	Weighted Average rate of all debt =				7.85%
	($1020000/ $13000000)
Expenditure for 2018
Jan 1,2018	$            10,00,000	X	12/12	=	$       10,00,000
March 1, 2018	$              6,00,000	X	10/12	=	$          5,00,000
June 30, 2018	$              8,00,000	X	6/12	=	$          4,00,000
October 1, 2018	$              6,00,000	X	3/12	=	$          1,50,000
	$            30,00,000				$       20,50,000
Interest Capitalized in 2018
	$            20,50,000	X	7.85%	=	$          1,60,925
Expenditure for 2019
Jan 1, 2019 ($3000000 + $160925)	$            31,60,925	X	9/9	=	$       31,60,925
Jan 31, 2019	$              2,70,000	X	8/9	=	$          2,40,000
April 30, 2019	$              5,85,000	X	5/9	=	$          3,25,000
August 31. 2019	$              9,00,000	X	1/9	=	$          1,00,000
	$            49,15,925				$       38,25,925
Interest Capitalized in 2019
$                      38,25,925	X	7.85%	X 9/12	=	$          2,25,251
Cost of Building
Expenditure for 2018				=	$       30,00,000
Interest Capitalized in 2018				=	$          1,60,925
Expenditure for 2019				=	$       17,55,000
Interest Capitalized in 2019				=	$          2,25,251
Total cost of building				=	$       51,41,176
Interest Expense for 2018:
Total Interest Incurred				=	$       10,20,000
Less : Interest Capitalized				=	$          1,60,925
2018 Expense				=	$          8,59,075
Interest Expense for 2019:
Total Interest Incurred				=	$       10,20,000
Less : Interest Capitalized				=	$          2,25,251
2019 Expense				=	$          7,94,749