Answer:
1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method.
interest capitalized in 2021 = $166,189
interest capitalized in 2022 = $77,956
2. What is the total cost of the building?
total construction costs ($6,375,000) + capitalized interests ($244,145) = $6,619,145
3. Calculate the amount of interest expense that will appear in the 2021 and 2022 income statements.
interest expense 2021 = $1,148,000 - $166,189 = $981,811
interest expense 2022 = $1,148,000 - $77,956 = $1,070,044
Explanation:
a 14%, $3,000,000 loan obtained on January 1, 2021
building was completed on September 30,2022
January 1, 2021: $1,050,000 x 12/12 = $1,050,000
March 1, 2021: $870,000 x 10/12 = $725,000
June 30, 2021: $390,000 x 6/12 = $195,000
October 1, 2021: $690,000 x 3/12 = $172,500
total weighted average expense 2021 = $2,142,500
weighted average interest rate:
$3,000,000 x 14% = $420,000
$4,900,000 x 5% = $245,000
$6,900,000 x 7% = $483,000
average interest rate = $1,148,000 / $14,800,000 = 7.7568%
interest capitalized in 2021 = $2,142,500 x 7.7568% = $166,189
January 31, 2022: $675,000 x 8/9 = $600,000
April 30, 2022: $990,000 x 5/9 = $550,000
August 31, 2022: $1,710,000 x 1/9 = $190,000
total weighted average expense 2021 = $1,340,000
weighted average interest rate:
$3,000,000 x 14% = $420,000
$4,900,000 x 5% = $245,000
$6,900,000 x 7% = $483,000
average interest rate = $1,148,000 / $14,800,000 = 7.7568%
interest capitalized in 2022 = $1,340,000 x 7.7568% x 9/12 = $77,956
