Problem 10-10 Interest capitalization; weighted-average method [LO10-7] On Janua
ID: 2648818 • Letter: P
Question
Problem 10-10 Interest capitalization; weighted-average method [LO10-7]
On January 1, 2013, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2014.
On January 1, 2013, the company obtained a $3 million construction loan with a 12% interest rate. The loan was outstanding all of 2013 and 2014. The companys other interest-bearing debt included two long-term notes of $5,500,000 and $7,500,000 with interest rates of 7% and 9%, respectively. Both notes were outstanding during all of 2013 and 2014. Interest is paid annually on all debt. The companys fiscal year-end is December 31.
Calculate the amount of interest that Mason should capitalize in 2013 and 2014 using the weighted-average method. (Round interest rate to 2 decimal places. Enter your answers in whole dollars.)
What is the total cost of the building? (Round interest rate to 2 decimal places. Enter your answers in whole dollars.)
Calculate the amount of interest expense that will appear in the 2013 and 2014 income statements.(Round interest rate to 2 decimal places. Enter your answers in whole dollars.)
On January 1, 2013, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2014.
Explanation / Answer
Loan 1 = 3000000 @ 12%
Loan 2 =5500000 @ 7%
Loan 3 = 7500000 @ 9 %
Total interest expense
Loan 1 = 360000
Loan 2 = 385000
Loan 3 = 675000
3) Total interest for the year 2013 = 1420000 same for the year 2014
1) Calculation of weighted average rate of interest
Total value of general loan = 13000000
Weighted average rate = (55/130*0.07)+(75/130*0.09)
=2.96+5.19
= 8.15
Interest amount to be capitalised
Total cost of construction = Cost + Interest
=7455000+739414
= 8194414
Interest in income statement 2013 =1420000-360000 i.e 1060000
Interest in income statement 2014 =1420000-270000-109414 i.e 1040586
Amount Financed Period Interest Rate Interest Specific/ General loan 3000000 21 months 12% 630000 specific 945000 8 months 8.15% 51345 general 1260000 5 months 8.15% 42787.50 general 2250000 1 month 8.15% 15281.25 generalRelated Questions
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