On January 1, 2016, the Mason Manufacturing Company began construction of a buil

Question

On January 1, 2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $ 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 $3 million construction loan with a 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.

Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the weighted-average method. (Do not round your intermediate calculations. Round your answers to the nearest whole dollars.)

Explanation / Answer

Calculation of Interest Cost to be capitalised

2016:
January 1, 2016 : 1,000,000 x 12/12 = $1,000,000
March 1, 2016 : 600,000 10/12 = $500000
June 30, 2016 : 800,000 x 6/12 = $400,000
October 1, 2016 :600,000 x 3/12 = $150000  
Average accumulated expenditures $2,050000
$2050000 x 10% = $205000 interest capitalized

2017:
January 1, 2017 $3,205,000 x 9/9 = $3,205,000
January 31, 2017 $270,000 x 8/9 = $240,000

April 30, 2017 $585,000 x 5/9 = $325,000
August 31, 2017 $900,000 x 1/9 = $100,000
Average accumulated expenditures $3870000

3,000,000 x 10% x 9/12 = $225,000

$3870000 - 3,000,000 = $870000 x 7.12% x 9/12 = 46458
Interest capitalized in 2017 $271458

Weighted average rate of all other debt:
$4,000000 x 6% = $240,000
$6,000,000 x 8% = $480,000

Total $720,000 / $10,000,000 = 7.12%

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