question archive On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters
On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters
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On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 March 1, 2021 June 30, 2021 October 1, 2021 January 31, 2022 April 30, 2022 August 31, 2022
$1,310,000 1,020,000 1,220,000 1,020,000 333,000 666,000 963,000
On January 1, 2021, the company obtained a $3,700,000 construction loan with a 12% interest rate. The loan was outstanding all of 2021 and 2022. 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 2021 and 2022. 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 2021 and 2022 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 2021 and 2022 income statements.
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Answer:
| Solution 1: | |||
| Year 2021: Weighted-Average accumulated expenditure and interest capitalized | |||
| Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
| 1-Jan-21 | $1,310,000 | 12/12 | $1,310,000 |
| 1-Mar-21 | $1,020,000 | 10/12 | $850,000 |
| 30-Jun-21 | $1,220,000 | 6/12 | $610,000 |
| 1-Oct-21 | $1,020,000 | 3/12 | $255,000 |
| Total | $4,570,000 | $3,025,000 | |
| *Interest rate | 12% | ||
| Interest capitalized in 2021 | $363,000 | ||
| Year 2022: Weighted-Average accumulated expenditure | |||
| Date | Amount | Capitalization period | Weighted Average Accumulated Expenditures |
| 1-Jan-22 | $4,933,000 | 9/9 | $4,933,000 |
| 31-Jan-22 | $333,000 | 8/9 | $296,000 |
| 30-Apr-22 | $666,000 | 5/9 | $370,000 |
| 31-Aug-22 | $963,000 | 1/9 | $107,000 |
| Total | $6,895,000 | $5,706,000 | |
| Weighted average interest rate of all other debt | |||
| Debt | Amount | Interest rate | Interest amount |
| 8% Note | $3,000,000 | 8% | $240,000 |
| 10% Note | $7,000,000 | 10% | $700,000 |
| Totals | $10,000,000 | $940,000 | |
| Weighted average rate (total interets/ total debt) | 9.40% | ||
| Year 2022: Interest Capitalized | |||
| Debt | Amount | ||
| 3700000*12%*9/12 = | $333,000 | ||
| (5706000- 3700000)*9.40%*9/12 = | $141,423 | ||
| Total interest capitalized in 2022 | $474,423 |
| Solution 2: | |||
| Computation of Cost of Building | |||
| Total expenditure before capitalization(6895000-363000) | $6,532,000 | ||
| Add: Interest capitalized in 2021 | $363,000 | ||
| Add: Interest capitalized in 2022 | $474,423 | ||
| Total cost of Building | $7,369,423 | ||
| Solution 3: | |||
| Computation of Interest expense | |||
| Debt | Amount | Interest rate | Interest amount |
| Construction Loan | $3,700,000 | 12% | $444,000 |
| 5% Note | $3,000,000 | 8% | $240,000 |
| 8% Note | $7,000,000 | 10% | $700,000 |
| Total interest incurred | $1,384,000 | ||
| 2021 | 2022 | ||
| Total interest incurred | $1,384,000 | $1,384,000 | |
| Less: Interest Capitalized | $363,000 | $474,423 | |
| Interest Expense | $1,021,000 | $909,577 |
