On January 1, 2018, the Mason Manufacturing Company began construction of a buil
ID: 2600119 • 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 $3,700,000 construction loan with a 12% interest rate. The loan was outstanding all of 2018 and 2019. The company’s other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 8% and 10%, 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
Caculation of Weighted average rate of all debt Debt Interest rate Interest 3700000 12% 444000 3000000 8% 240000 7000000 10% 700000 13700000 1384000 Average interest rate =1384000/13700000 =0.1010 =10.10% 1 amount of interest that Mason should capitalize in 2018 and 2019 using the specific interest method date Expenditure no of months used Average Expenditure Jan 01,2018 1310000 12 1310000 march1,2018 1020000 10 850000 June 30,2018 1220000 6 610000 oct 1,2018 1020000 3 255000 Accumulated Expenditure 4570000 Average Accumulated expenditure 3025000 305525 Interest to be capitalised for for the year 2018 =$3025,000 *10.10% =$305,525 date Expenditure no of months used Average Expenditure Jan 01,2019 4875525 9 4875525 Jan31,2019 333000 8 296000 April 30,2019 666000 5 370000 August 31,2019 963000 1 107000 Accumulated Expenditure 6837525 Average Accumulated expenditure 5648525 Interest to be capitalised for the year 2019 =$6837,525 *10.10% =$570,501 2 Total cost of the Building Accumulated expenditures including 2018 capitalised interst =$6,837,525 interest capitalised in 2019 =$570501 Total cost of the Building =$6837,525+$570501 =$7408,026 3 Interest expenses for the income statements for the years 2018 and 2019 2018 2019 Interest on the debts paid 1384000 1384000 Less: interest capitalised 305525 570501 Interest expenses 1078475 813499