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:

January 1, 2018	$	1,180,000
March 1, 2018		660,000
June 30, 2018		860,000
October 1, 2018		660,000
January 31, 2019		279,000
April 30, 2019		612,000
August 31, 2019		909,000

On January 1, 2018, the company obtained a $3,100,000 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 $4,000,000 and $6,000,000 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.

Answer 1

For Year 2018 PART A Outstanding Period in which Expenditure Total cost of building 2018 Particulars expendi red PART B PART C ear amount 1180000 550000 3100000 4000000 01-01-2018| 1180000 Particulars Amount 372000 3360000 Expenditures in 2018 01-03-2018 660000 320000 600000 30-06-2018 860000 430000 interest capitalised in 2018 279000 6000000 1292000 01-10-2018 660000 165000 Expenditure in 2019 apitalised in 2019 5439000 Total talised Expenditure Average accumulated expenditure Interest to be capitalised 3 in 2018 363732 ОО Interest expense in Total cost of building 2325000 incorme statement 9441732 1013000 279000 Particulars Amount 372000 For year 2019 2019 3100000 Period in which Outstanding expenditure inc urine Exp conconn 600on 3639000 019 31-01-2019 Total Capitalised Interest expense in 279000 248000 1292000 30-04-2019 40000 612000 363732 928268 101000 Income statement 2019 430000 Expenditure incurred Average accumulated expenditure Interest to be capitalised in 2018 4328000 363732 Weighted average rate of I other debt: 4000000 32000C 6000000 600000 970000 Weighted average rate of all other debt Interest capitalised 9.20% 3100000 279000 1228000 84732

PART A For Year 2018 Expenditure 1180000 Period in which expenditure Incurred 43101 Outstanding during the year +D3 * 12/ 12 660000 860000 660000 -SUM(D3 :D6 ) +D4*10/12 +D5*6/ 12 +D6 3/12 43160 43281 43374 Expenditure incurred 2. Average accumulated expenditure - SUM ( E3 : E7 ) - E8*12% 3 Interest to be capitalised in 2018 For year 2019 Outstanding during the year +D14 * 12 / 12 Period in which expenditure incurred Expenditure - + D7 + E9 279000 43466 - +D15 * 8 /9 43496 = + D16 * 5 / 9 612000 43585 - +D17 909000 =SUM (D14 : D1 7) 1 / 9 43708 Expenditure incurred 1 Average accumulated expenditure =SUM(E14:E18) 2 Interest to be capitalised in 2018 3 - +D28 + D29 Weighted average rate of all other debt: +C23 * 8 % 4000000 - + C24* 10 % 6000000 10000000 SUM(D23:D24) Weighted average rate of all other debt Interest capitalised =+D25/C25 +C28*12%*9/12 -C29*D26*9/12 3100000 -E19-C28

Total cost of building amount PART C 2018 Particulars Amount 3100000 - 03 12 % Particulars E toliced in 2018 Freeonn Ot 370op0 -sUM(P3 :PS) Total Expenditure In 2019 Interest capitalised in 2019 5439000 Capitalised 363732 279000 Total cost of building -SUMU4: J 7 ) Interest expense income statement =P6 P7 Particulars Amount =+ 012 -12 % 2019 4000000 013 " 8 % = =+014*10 % 6000000 Total 1P14) Italised |Interest expense in income statement -+P15-P16