1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method.
On January 1, 2021, the company obtained a $3 million loan with a 10% interest rate. The building was completed on September 30, 2022. Expenditures on the project were as follows:
| January 1, 2021 | $ | 1,080,000 | |
| March 1, 2021 | 900,000 | ||
| June 30, 2021 | 320,000 | ||
| October 1, 2021 | 700,000 | ||
| January 31, 2022 | 720,000 | ||
| April 30, 2022 | 1,035,000 | ||
| August 31, 2022 | 1,800,000 | ||
On January 1, 2021, the company obtained a $3 million construction loan with a 10% interest rate. Assume the $3 million loan is not specifically tied to construction of the building. The loan was outstanding all of 2021 and 2022. The company’s other interest-bearing debt included two long-term notes of $5,000,000 and $7,000,000 with interest rates of 5% and 8%, respectively. Both notes were outstanding during all of 2021 and 2022. Interest is paid annually on all debt. The company’s fiscal year-end is December 31.
Required:
1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the weighted-average method.
2. What is the total cost of the building?
3. Calculate the amount of interest expense that will appear in the 2021 and 2022 income statements.
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