Interest During Construction
Matrix Inc. borrowed $1,000,000 at 8% to finance theconstruction of a new building for its own use. Construction beganon January 1, 2016, and was completed on October 31, 2016.Expenditures related to this building were:
January 1 $252,000 (includes cost of purchasing land of $150,000) May 1 310,000 July 1 420,000 October 31 276,000
In addition, Matrix had additional debt (unrelated to theconstruction) of $500,000 at 9% and $800,000 at 10%. All debt wasoutstanding for the entire year.
Required:
1. Compute the amount of interest capitalized related to theconstruction of the building.
2. If the expenditures are assumed to have been incurred evenlythroughout the year:
a. Compute weighted average accumulated expenditures.
b. Compute the amount of interest capitalized on the building.
Interest During Construction
Matrix Inc. borrowed $1,000,000 at 8% to finance theconstruction of a new building for its own use. Construction beganon January 1, 2016, and was completed on October 31, 2016.Expenditures related to this building were:
| January 1 | $252,000 | (includes cost of purchasing land of $150,000) |
| May 1 | 310,000 | |
| July 1 | 420,000 | |
| October 31 | 276,000 |
In addition, Matrix had additional debt (unrelated to theconstruction) of $500,000 at 9% and $800,000 at 10%. All debt wasoutstanding for the entire year.
Required:
1. Compute the amount of interest capitalized related to theconstruction of the building.
2. If the expenditures are assumed to have been incurred evenlythroughout the year:
a. Compute weighted average accumulated expenditures.
b. Compute the amount of interest capitalized on the building.
Related questions
On January 1, 2016, the Mason Manufacturing Company beganconstruction of a building to be used as its office headquarters.The building was completed on September 30, 2017. |
| Expenditures on theproject were as follows: |
| January 1, 2016 | $ | 1,090,000 | |
| March 1, 2016 | 780,000 | ||
| June 30, 2016 | 980,000 | ||
| October 1, 2016 | 780,000 | ||
| January 31,2017 | 297,000 | ||
| April 30, 2017 | 630,000 | ||
| August 31, 2017 | 927,000 | ||
On January 1, 2016, the company obtained a $3,300,000construction loan with a 16% interest rate. The loan wasoutstanding all of 2016 and 2017. The companyâs otherinterest-bearing debt included two long-term notes of $2,000,000and $8,000,000 with interest rates of 10% and 12%, respectively.Both notes were outstanding during all of 2016 and 2017. Interestis paid annually on all debt. The companyâs fiscal year-end isDecember 31. |
| Required: |
| 1. | Calculate the amount of interest that Mason should capitalize in2016 and 2017 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 the2016 and 2017 income statements. |
