# On January 1, 2016, the Mason Manufacturing Company

March 14, 2016

Question
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On January 1, 2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2017.

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Expenditures on the project were as follows:

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January 1, 2016 \$ 2,050,000
March 1, 2016 1,800,000
June 30, 2016 2,000,000
October 1, 2016 1,800,000
January 31, 2017 450,000
April 30, 2017 783,000
August 31, 2017 1,080,000

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On January 1, 2016, the company obtained a \$5,000,000 construction loan with a 9% interest rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing debt included two long-term notes of \$6,000,000 and \$9,000,000 with interest rates of 5% and 8%, respectively. Both notes were outstanding during all of 2016 and 2017. Interest is paid annually on all debt. The company’s fiscal year-end is December 31.

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Required:
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1.

Calculate the amount of interest that Mason should capitalize in 2016 and 2017 using the specific interest method.

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2.

What is the total cost of the building?

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3.

Calculate the amount of interest expense that will appear in the 2016 and 2017 income statements.

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