On January 1, 2016, the Mason Manufacturing Company began construction of a buil
ID: 2451239 • 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 11% interest rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing debt included two long-term notes of $4,200,000 and $6,200,000 with interest rates of 6% and 8%, 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.)
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.)
References
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WorksheetDifficulty: 3 HardLearning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.
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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.
Explanation / Answer
1. Rate of capitalization for specific borrowings = 11%
Statement showing calculation of rate of capitalization for other borrowings
Rate of capitalization = $748000/$10400000 = 7.19%
Statement showing interest to be capitalized
Thus, amount of interest to be capitalized in 2016= $238150
amount of interest to be capitalized for 2017 = $43949
2. Total cost of building = $5115000+$282099
= $5397099
3. Total interest incurred for in 2016 = $3000000*11% + $748000
= $1078000
Amount capitalized in 2016 = $238150
Amount tobe charged as expenses = $10780000 - $238150 = $839850
Total amount incurred in 2017 - $1078000
Amount capitalized = $43949
Amount to be charged as expense = $1078000 - $43949
= $1034051
Amount borrowed Interest amount 1. Debt @ 6% $4200000 $252000 2. Debt @ 8% $6200000 $496000 Total $10400000 $748000