On January 1, 2016, the Mason Manufacturing Company began construction of the bu
ID: 2466237 • Letter: O
Question
On January 1, 2016, the Mason Manufacturing Company began construction of the building to be sued as its office headquarters. The building was completed on September 30, 2017. Expenditures on the project were as follows:
January 1, 2106 $1,000,000
March 1, 2016 600,000
June 30, 2016 800,000
October 1, 2016 600,000
January 31, 2017 270,000
April 30, 2017 585,000
August 31, 2017 900,000
On January 1, 2016 the company obtained a $3Million construction loan with 10% interest rate. The loan was outstanding all of 2016 and 2017. The company's other interest- bearing debt included two long-term notes of $4,000,000 and $6,000,000 with interest rates of 6% and 8% , respectively. Both notes were outstanding during all of 2016 and 2017. Interest is paid annually on all debt. The company's fiscal year-end is December 31.
1. Caluclate the amount of interest that Mason should capitalize in 2016 and 2017 using the specific interest method.
2. What is the total cost of the building.
3. Calculate the amount of interest that will appear in the 2016 and 2017 income statements.
Explanation / Answer
Answer For 2016 Payment Date Expentiture Capitlization Weight Weighted Period Expenses A B C = B/12 D = A*C Jan-01-2016 1000000 12 1.00 1000000 Mar- 01-2016 600000 10 0.83 500000 Jun-30-2016 800000 6 0.50 400000 Oct-01-2016 600000 3 0.25 150000 Total 2050000 all amount is financed by specific loan i.e. 3 Million Interest should be Capitalized in 2016 Funding Amount rate Capitalized Intt Specific Loan 2050000 10% 205000 For 2017 Payment Date Expentiture Capitlization Weight Weighted Period Expenses A B C = B/12 D = A*C Jan-01-2017 3000000 12 1.00 3000000 Jan-31-2017 270000 11 0.92 247500 Apr-30-2017 585000 8 0.67 390000 Aug-31-2017 900000 4 0.33 300000 Total 4755000 3937500 Loan Principal Rate Annual Interest 1 4000000 6% 240000 2 6000000 8% 480000 Total 10000000 720000 Weighted interest rate 720000/1000000 7.20% Interest should be Capitalized in 2017 Funding Amount rate Capitalized Intt Specific Loan 3000000 10.0% 300000 General Loan 937500 7.2% 67500 Toatl Capitalized interest 367500 Answer 1 Capitalized interest in Year Interest Capitalized 2016 205000 2017 367500 Answer 2 Total Cost of Building Total Payments + capitalized interest = 4755000+367500+205000 Total Cost of Building = $ 5327500 Answer 3 Amount of interest appear in Income Statement of 2016 Loan Amount Interest Rate Interest 3000000 10% 300000 4000000 6% 240000 6000000 8% 480000 Total 13000000 1020000 Less Interest Capitalized 205000 Interest transfer to Income Statement 815000 Amount of interest appear in Income Statement of 2017 Loan Amount Interest Rate Interest 3000000 10% 300000 4000000 6% 240000 6000000 8% 480000 Total 13000000 1020000 Less Interest Capitalized 367500 Interest transfer to Income Statement 652500
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