Question

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 $1,420,000 1,140,000 1,340,000 1,140,000 351,000 684,000 981,000 On January 1, 2021, the company obtained a $3,900,000 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 $6,000,000 and $9,000,000 with intere 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.

Answer 1

1) a.Calculation of Capitalized Interest for 2021(Amounts in $):

Particulars	Month wise Expenditure	Amount
January 1,2021	1,420,000*(12/12)	1,420,000
March 1,2021	1,140,000*(10/12)	950,000
June 30,2021	1,340,000*(6/12)	670,000
October 1,2021	1,140,000*(3/12)	285,000
Accumulated Expenditure before interest (A)	5,040,000
Average Accumulated Expenditure (B)		3,325,000
Interest Capitalized (A*12%) (C)		399,000

b.Calculation of Capitalized Interest for 2022 (Amounts in $):

Particulars	Month wise Expenditure	Amount
January 1,2022 (5,040,000 +399,000)	5,439,000*(9/9)	5,439,000
January 31,2022	351,000*(8/9)	312,000
April 30,2022	684,000*(5/9)	380,000
August 31,2022	981,000*(1/9)	109,000
Accumulated Expenditure before interest	7,455,000
Average Accumulated Expenditure (A)		6,240,000
Weighted average rate for all other debt	600,000*8% = 480,000
	900,000*10% = 900,000
Weighted average rate	[(480,000+900,000)/(6,000,000+9,000,000)]*100	9.2%
Interest Capitalized 2012:
For loan amount	3,900,000*12%	468,000
Remaining amount of Expenditure (6,240,000 - 3,900,000)	2,340,000*9.2%	215,280
Total Interest Capitalized 2012		683,280

Note: 9 month period is taken to calculate the average accumulated expenditure because the construction stands completed on September 30,2022.

2. Calculation of total Cost of Building(Amounts in $):

Expenditure in 2021	5,040,000
Interest Capitalized in 2021	399,000
Expenditure in 2022 (351,000+684,000+981,000)	2,016,000
Interest Capitalized in 2022	683,280
Total Cost of Building	8,138,280

3. Calculation of Interest Expense in 2021 and 2022(Amounts in $):

2021:

Total Interest Incurred
3,900,000*12%	468,000
6,000,000*8%	480,000
9,000,000*10%	900,000
total Interest Incurred (A)	1,848,000
Interest Capitalized in 2021 (B)		399,000
Interest Expenses for 2021 (A-B)		1,449,000

2022:

Total Interest Incurred
3,900,000*12%	468,000
6,000,000*8%	480,000
9,000,000*10%	900,000
total Interest Incurred (A)	1,848,000
Interest Capitalized in 2022(B)		683,280
Interest Expenses for 2022(A-B)		1,164,720