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	$	1,090,000
March 1, 2021		780,000
June 30, 2021		980,000
October 1, 2021		780,000
January 31, 2022		297,000
April 30, 2022		630,000
August 31, 2022		927,000

On January 1, 2021, the company obtained a $3,300,000 construction loan with a 16% interest rate. The loan was outstanding all of 2021 and 2022. 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 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.

Complete this question by entering your answers in the tabs below. Req 1 and 3 Reg 2 Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the specific interest method and interest expense that will appear in the 2021 and 2022 income statements. (Do not round intermediate calculations.) 2021 2022 Interest capitalized Interest expense < Req 1 and 3 Req2 >

Answer 1

Part 1: date Specific interest method calculation of average accumulated expenditure-2021 expenditure capitalisation period weight weighted expenditure I b c=b/12 | a*c 1,090,000 1.00 1,090,000 780,000 10 0.83 650,000 980,000 6 0.50 490,000 780,000 30 0.25 195,000 3,630,000 2,425,000 Jan 1,2021 Mar 1,2021 Jun 30, 2021 Oct 1,2021 12 388,000 Interest capitalized in 2021 (2425000*16%) date ام | Jan 1,2022 (3630000+388000) Jan 31,2022 Apr 30,2022 Aug 31,2022 calculation of average accumulated expenditure-2022 expenditure capitalisation period weight weighted expenditure c=b/9 a*c 4,018,000 1.00 4,018,000 297,000 80.89 264,000 630,000 5 0.56 350,000 927,000 1 0.11 __ 103,000 5,872,000 4,735,000 | Weighted average rate of all other debt: borrowing 2,000,000 8,000,000 10,000,000 Interest rate 10% 12% Interest amount 200,000 960,000 1,160,000 11.60% Weighted average rate of all other debt: (1160000/10000000) Interest capitalized in 2022 (3300000*16%*9/12) (4735000-3300000)* 11.6%*9/12 Interest capitalized in 2022 396,000 124,845 520,845

Part 2: Expenditures in 2021 Interest capitalized in 2021 Expenditures in 2022 (297000+630000+927000) Interest capitalized in 2022 Total cost of building | 3,630,000 388,000 1,854,000 520,845 6,392,845 2,021 2,022 Part 3: calculation of Interest Expense Total interest incurred (3300000*16%) (2000000*10%) (8000000*12%) Total interest incurred Less: Interest Capitalized Interest Expense 528,000 200,000 960,000 1,688,000 388,000 1,300,000 528,000 200,000 960,000 1,688,000 520,845 1,167,155