Question

# Coronado Furniture Company started construction of a combination office and warehouse building for its own use...

Coronado Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \$8,500,000 on January 1, 2020. Coronado expected to complete the building by December 31, 2020. Coronado has the following debt obligations outstanding during the construction period.

 Construction loan-10% interest, payable semiannually, issued December 31, 2019 \$3,400,000 Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2021 2,380,000 Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,700,000

(a)

Assume that Coronado completed the office and warehouse building on December 31, 2020, as planned at a total cost of \$8,840,000, and the weighted-average amount of accumulated expenditures was \$6,120,000. Compute the avoidable interest on this project. (Use interest rates rounded to 4 decimal places, e.g. 7.5825% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.)

 Avoidable Interest \$

Ans:

 Calculation of weighted average interest rate: Type of loan Principal Interest Rate Interest Short Term Loan-8% Interest 2380000 8% 190400 Long Term Loan-9% Interest 1700000 9% 153000 Total 4080000 343400 Weighted Average Interest Rate= Total Interest / Total Principal 0.084166667 8.416666667 Available Interest Calculation: Particulars Principal Balance of Weighted Average Accumulated Expenditure Interest Rate Available Interest Interest on Loan specifically for Contruction 3,400,000 10% 340,000 Interest on remaining loan upto weighted average expenditure total using weighted average interest rate 2,720,000 8.42% 229024 Total 6,120,000 569024 Available Interest \$ 569,024

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