On January 1, 2016, the Mason Manufacturing Company began construction of a buil
ID: 2427830 • 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 $4,300,000 construction loan with a 12% interest rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 8% and 10%, 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 specific interest method.
2.
What is the total cost of the building?
3.
Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements.
Expenditures on the project were as follows:Explanation / Answer
1)2016: (4,300,000*12%)+(3,000,000*8%)+(7,000,000*12%)=$1,596,000
2017: (4,300,000*12%)+(3,000,000*8%)+(7,000,000*12%)=$1,596,000
2)Total cost=sum of expenditure+interest paid
=8,204,000+1596000+1596000=$11,396,000