On January 1, 2016, the Mason Manufacturing Company began construction of a buil
ID: 2476153 • 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 $4,700,000 and $6,700,000 with interest rates of 7% and 9%, 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.)
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.Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the weighted-average method.
Weighted-average rate of all debt:
$3,000,000*10% = $300,000
4,700,000*6% = $282,000
6,700,000*9% =$603,000
$14,400,000 = 1,185,000
$1,185,000/14,400,000 = 8.23%
What is the total cost of the building?
Expenditures for 2016
: Accumulated expenditures (before interest) - $3,000,000
Average accumulated expenditures -$228,250
1/1/2016- 1,360,000 *12/12= $1,360,000
03/01/2016 - 810,000*10/12 = $675,000
06/30/2016 160,000*6/12 = 80,000
10/1/2016 =670,000*3/12 = 167,500
Total =$2,282,500
Interest capitalised = 2,282,500*8.23% = 187850 = Interest capitalized in 2016
Expenditures for 2017:
Jan 31,2017 = 585,000*8/9 = $520,000
April 30,2017 =900,000*5/9 = $500,000
August 31,20107 =1,530,000*1/9 = $170,000
Accumulated expenditures (before interest) = $3,015,000
Average accumulated expenditures = $1,190,000*8.23%*9/12 = $73,453 = Interest capitalised in 2017
Cost of Building:
Expenditures in 2016 $3,000,000
Interest capitalized in 2016 187,850
Expenditures in 2017 3,015,000
Interest capitalized in 2017 73,453
Total cost of building $6,276,303
Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements
Interest Expense for 2016
Total int incurred 14,400,000
Less: Capitalized (187,850)
2016 Expense = 14,212,150
Interest Expense for 2017
Total int incurred = 14,400,000
Less: cpiatlised (73,753)
2017 expense = 14,326,247