Question

On January 1, 2019, the company obtained a $3 million loan with a 12% interest rate. The building was completed on September 30, 2020. Expenditures on the project were as follows:

January 1, 2019	$	1,330,000
March 1, 2019		780,000
June 30, 2019		230,000
October 1, 2019		660,000
January 31, 2020		540,000
April 30, 2020		855,000
August 31, 2020		1,440,000

On January 1, 2019, the company obtained a $3 million construction loan with a 12% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2019 and 2020. The company’s other interest-bearing debt included two long-term notes of $4,600,000 and $6,600,000 with interest rates of 6% and 8%, respectively. Both notes were outstanding during all of 2019 and 2020. 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 2019 and 2020 using the weighted-average method.
2. What is the total cost of the building?
3. Calculate the amount of interest expense that will appear in the 2019 and 2020 income statements.

Answer 1

Year 2019 Calculation of weighted Average Accumulated Expenditure Date of Construction expenses made Amount Paid Months outstanding from the Capitalization date of payment to Dec 2019 period C = B/12 January 01, 2019 March 01, 2019 June 30, 2019 October 01, 2019 1,330,000 12 months 780,000 10 months 230,000 6 months 660,000 3 months 3,000,000 12/12 10/12 6/12 3/12 Weighted Average Accumulated Expenditures D| = (A *C) (1,330,000 ~ 12/12) 1,330,000 (780,000 x 10/12) 650,000 (230,000 x 6/12) 115,000 (660,000 x 3/12) 165,000 2,260,000 Total Calculation of Weighted Average all debt Rate of Interest [B] 12% Amount of Loan [A] 3,000,000 4,600,000 6,600,000 14,200,000 (1,164,000 / 14,200,000) $3 Million construction Loan 6% long term notes 8% long term notes Total Weighted Averagae rate of All debts Interest Amount [A*B] 360,000 276,000 528,000 1,164,000 6% 8% 8.20% Interest to be capitalized in year 2019 (Average accumulated expenditure x Weighted average rate) (2,260,000 8.20%) 185,320

$ 3,185,320 Capitalization period C = B/9 Weighted Average Accumulated Expenditures D = (A *C) In Year 2020 Beginning Expenditure cost (3,000,000 + 185,320) = Calculation of Weighted Average Accumulated Expenditure Date of Construction expenses Months outstanding from the Amount Incurred date of payment to 30 made September 2020 January 01, 2020 3,185,3209 Months January 31, 2020 540,000 8 Months April 30, 2020 855,000 5 Months August 31, 2020 1,440,000 1 Months Total 6,020,320 9/9 8/9 (3,185,320 x 9/9) (540,000 ~ 8/9) (855,000 5/9) |(1,440,000 ~ 1/9) 5/9 3,185,320 480,000 475,000 160,000 4,300,320 1/9 Interest to be capitalized in year 2020 (Average accumulated expenditure Weighted average rate x 9/12) (4,300,320 x 8.20% ~ 9/12) 264,470 3) Amount of Interest Expense In Year 2019 Total Interest Less: Interest capitalized in 2019 Interest expense 1,164,000 (185,320) 978,680 In Year 2020 Total Interest Less: Interest capitalized in 2019 Interest expense 1,164,000 (264,470) 899,530 2020 Interest Captilalized Interest expense 2019 185,320 978,680 264,470 899,530

1,330,000 780,000 230,000 660,000 2) Cost of Building Expenditures incurred in 2019 January 01, 2019 March 01, 2019 June 30, 2019 October 01, 2019 Add: Interest cost capitalized in 2019 Expenditures incurred in 2020 January 31, 2020 April 30, 2020 August 31, 2020 Add: Interest cost capitalized in 2020 Total Cost of Building 3,000,000 185,320 540,000 855,000 1,440,000 2,835,000 264,470 6,284,790 Total Cost of Building 6,284,790