Question

Flint Inc. is a book distributor that had been operating in its original facility since 1990. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Flint since 2015. Flint’ original facility became obsolete by early 2020 because of the increased sales volume and the fact that Flint now carries CDs in addition to books.

On June 1, 2020, Flint contracted with Black Construction to have a new building constructed for $5,120,000 on land owned by Flint. The payments made by Flint to Black Construction are shown in the schedule below.

Date		Amount
July 30, 2020		$1,152,000
January 30, 2021		1,920,000
May 30, 2021		2,048,000
Total payments		$5,120,000

Construction was completed and the building was ready for occupancy on May 27, 2021. Flint had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2021, the end of its fiscal year.

10%, 5-year note payable of $2,560,000, dated April 1, 2017, with interest payable annually on April 1.

12%, 10-year bond issue of $3,840,000 sold at par on June 30, 2013, with interest payable annually on June 30.

The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.

a)

Compute the weighted-average accumulated expenditures on Flint’s new building during the capitalization period.

Weighted-Average Accumulated Expenditures

$

B) Compute the amount of avoidable interest

Answer 1

a) Computation the weighted-average accumulated expenditures on Flint’s new building during the capitalization period :-

Date	Amount ($) (A)	Capitalization Period (B)	Weighted-average accumulated expenditures ($) [AxB]
July 30, 2020	1,152,000	10/12	960,000
January 30, 2021	1,920,000	4/12	640,000
May 30, 2021	2,048,000	0	0

TOTAL   5,120,000

1,600,000

b) Computation the amount of avoidable interest :-

1) Computation of Weighted average interest rate

Particulars	Principal ($)	Interest ($)
10%, 5-year note payable	2,560,000	256,000
12%, 10-year bond issue	3,840,000	460,800
TOTAL	6,400,000	716,800

Weighted average interest rate = (Total Interest/Total Principal) x 100

= (716800/6400000) x 100

= 11.2%

2) Avoidable interest = (Weighted-average accumulated expenditures x Weighted average interest rate)

= $1,600,000 x 11.2%

= $179,200