On January 1, 2018, the Mason Manufacturing Company began construction of a buil
ID: 2528376 • 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 January 1, 2018 March 1, 2018 June 30, 2018 October 1, 2018 January 31, 2019 April 30, 2019 August 31, 2019 $1,820,000 1,440,000 1,640,000 1,440,000 396,000 729,000 1,026,000 On January 1, 2018, the company obtained a $4,400,000 construction loan with a 14% 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
Date exp No. of months weighted exp Jan 1 2018 $1,820,000 12/12 $1,820,000 Mar 1 2018 1440000 10/12 $1,200,000 June 30 2018 1640000 6/12 $820,000 Oct 1 2018 1440000 3/12 $360,000 Total $6,340,000 $4,200,000 Interest capitalized in 2018 4200000*14% $588,000 Expenditue for 2019 Date exp No. of months weighted exp Jan 1 2019 (6340000+588000) $6,928,000 9/9 $6,928,000 Jan 31 2019 396000 8/9 $352,000 April 30 2019 729000 5/9 $405,000 Aug 31 2019 1026000 1/9 $114,000 Total $9,079,000 $7,799,000 weighted avg rate Rate Amt Int Long term notes 10% $2,000,000 $200,000 12% $8,000,000 $960,000 Total $10,000,000 $1,160,000 weighted avg rate 1160000/10000000*100 11.60 % Interest capitalized 4400000*14%*9/12 462000 (7799000-4400000)*11.6%*9/12 295713 Interest capitalized 757713 Interest expense 2018 Rate Amt Int Specific loan 14% 4400000 $616,000 Long term notes 10% $2,000,000 $200,000 Long term notes 12% $8,000,000 $960,000 Total $1,776,000 Less: interest capitalized ($588,000) Interest expenses $1,188,000 Interest expense 2018 Rate Amt Int Specific loan 14% 4400000 $616,000 Long term notes 10% $2,000,000 $200,000 Long term notes 12% $8,000,000 $960,000 Total $1,776,000 Less: interest capitalized $757,713 Interest expenses $1,018,287 Ans 1 and 3 2018 2019 Interest capitalized $588,000 $757,713 Interest expenses $1,188,000 $1,018,287 ans 2 Cost of buidlding Exp in 2018 $6,340,000 Add: interest capitalized $588,000 Exp in 2019 2151000 Interest capitalized $757,713 Cost of buidlding $9,836,713