On January 1, 2018, the Mason Manufacturing Company began construction of a buil
ID: 2528254 • Letter: O
Question
On January 1, 2018, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2019.
Expenditures on the project were as follows:
On January 1, 2018, the company obtained a $3,300,000 construction loan with a 16% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $2,000,000 and $8,000,000 with interest rates of 10% and 12%, respectively. Both notes were outstanding during all of 2018 and 2019. Interest is paid annually on all debt. The company’s fiscal year-end is December 31.
Required:
1. Calculate the amount of interest that Mason should capitalize in 2018 and 2019 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 2018 and 2019 income statements.
Explanation / Answer
Expenditures for 2018: Amount Time period Average accumulated expenditures January 1, 2018 1090000 12/12 1090000 March 1, 2018 780000 10/12 650000 June 30, 2018 980000 6/12 490000 October 1, 2018 780000 3/12 195000 Total 3630000 2425000 Interest capitalized = 2425000*16%= $388000 Expenditures for 2017: Amount Time period Average accumulated expenditures January 1, 2017 4018000 9/9 4018000 January 31, 2017 297000 8/9 264000 April 30, 2017 630000 5/9 350000 August 31, 2017 927000 1/9 103000 Total 5872000 4735000 Weighted average interest rate: Amount Interest 10% note 2000000 200000 12% note 8000000 960000 Total 10000000 1160000 Weighted average interest rate = 1160000/10000000= 11.60% Interest capitalized: 3300000*16%/12*9= 396000 1435000*11.6%/12*9= 124845 Total 520845 1 2018 2019 Interest capitalized 388000 520845 2 Total cost of building = 5872000+520845= $6392845 3 Interest expense: 2018 1300000 =(3300000*16%)-388000+1160000 2019 1167155 =(3300000*16%)-520845+1160000