Problem - 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.
Expenditures on the project were as follows:
January 1, 2013 $ 1,000,000
March 1, 2013 600,000
June 30, 2013 800,000
October 1, 2013 600,000
January 31, 2014 270,000
April 30, 2014 585,000
August 31, 2014 900,000
On January 1, 2013, the company obtained a $3 million construction loan with a 10% interest rate. The loan was outstanding all of 2013 and 2014. 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 2013 and 2014. Interest is paid annually on all debt. The company's fiscal year-end is December 31.
1. Calculate the amount of interest that Mason should capitalize in 2013 and 2014 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 the 2013 and 2014 income statements.