On January 1, 2016, the Mason Manufacturing Company began construction of a buil
ID: 2481733 • 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. Expenditures on the project were as follows: On January 1, 2016, the company obtained a $3 million construction loan with a 14% interest rate. The loan was outstanding all of 2016 and 2017. The company's other interest-bearing debt included two long-term notes of $4,900,000 and $6,900,000 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.) What is the total cost of the building? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)Explanation / Answer
Payment Date Expenditures Capitalization Period(Months) Weight Weighted Expenditures (A) (B) (C=B/12) (A×C) 01-Jan-16 1,050,000 12 1 1,050,000 01-Mar-16 870,000 10 0.83 725,000 30-Jun-16 390,000 6 0.5 195,000 01-Oct-16 690,000 3 0.25 172,500 Acc. Expre. 3,000,000 Wt. Av. Expre.= 2,142,500 This is wholly funded by the construction loan-int. 14% Estimate of avoidable interest 2016 Funding Amount Rate Avoidable Interest Costruction Loan 2,142,500 14% 299,950 Interest capitalised for 2016 = 299,950 Following journal entry while recording the capitalized interest Building 299950 Interest Expense 299950 Payment Date Expenditures Capitalization Period(Months) Weight Weighted Expenditures (A) (B) (C=B/9) (A×C) 01-Jan-17 3299950 9 1 3299950 31-Jan-17 675000 8 0.89 600000 30-Apr-17 990,000 5 0.56 550000 31-Aug-17 1,710,000 1 0.11 190000 Acc. Expre. 6,674,950 Wt. Av. Expre. 4,639,950 Out of this 4639950 ,(3000000) is financed by specific construction loan. The rest i.e. 1639950 is financed by the long-term Notes. The interest rate on construction loan is 14 % while the weighted interest rate on the Notes is calculated below. Notes Principal Rate Annual Interest I 4,900,000 5% 245,000 II 6,900,000 7% 483,000 11,800,000 728,000 Weighted-average Interest Rate = 728000/11800000 6.17 % Estimate of avoidable interest 2017 Funding Amount Rate for 9 mths. Avoidable Interest Costruction Loan 3,000,000 14% 315,000 Notes 1,639,950 6.17% 75,889 Wt. av. Expre 4,639,950 Int. capitalised 390,889 Interest capitalised for 2017 = 390889 Following journal entry while recording the capitalized interest Building 390889 Interest Expense 390889 2. Total cost of Building Acc. Expre. 6674950 Int. capitalised in 2017 390889 7065839