On January 1, 2016, the Mason Manufacturing Company began construction of a buil
ID: 2419211 • Letter: O
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.
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 $4,500,000 and $6,500,000 with interest rates of 5% and 7%, 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.
Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the weighted-average method. (Do not round intermediate calculations. Round your answers to the nearest whole dollars.)
2.)What is the total cost of the building? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)
Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements. (Do not round intermediate calculations. Round your answers to the nearest whole dollars.)
Expenditures on the project were as follows:Explanation / Answer
total construction period to complete Building = 21 year ( from january 2016 to september 2017)
1. 2016 capitalise interest (from january,2016 to December,2016)
expenditure months interest
January 1300000 12 / 12 1300000
March 750000 10/ 12 625000
June 300000 6/12 150000
October 650000 3/12 162500
Total Interest in 2016 $2237500
interest capitalised in 2016 = 10%* $2237500
= $223750
2017 capitalise interest (from january,2017 to September ,2017)
expenditure months interest
opening january balance(3000000+223750) 9/9 3223750
january 495000 8 /9 440000
april 810000 5/9 450000
August 1350000 1 /9 150000
4263750
interest expense on $3000000 at 10% upto 30 september,2017 = 3000000 * 10% * 9/12
= 225000
Remaining interest expenditure (4263750 - 3000000) =1263750 * 6.18% * 9/12
=$58575
Interest to be capitlaised for 2017 =225000 + 58575
= $283575
Note:- average interest rate on long term note
on 4500000 at 5% = 225000
on 6500000 at 7% =455000
=$680000
interest rate on total long term note = $680000 / (4500000 + 6500000)
= 680000 / 11000000
=6.18% annually