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|
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 $6,120,000. Compute the avoidable interest on this project. (Use interest rates rounded to 4 decimal places, e.g. 7.5825% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.)
|Calculation of weighted average interest rate:|
|Type of loan||Principal||Interest Rate||Interest|
|Short Term Loan-8% Interest||2380000||8%||190400|
|Long Term Loan-9% Interest||1700000||9%||153000|
|Weighted Average Interest Rate=||Total Interest / Total Principal|
|Available Interest Calculation:|
|Particulars||Principal Balance of Weighted Average Accumulated Expenditure||Interest Rate||Available Interest|
|Interest on Loan specifically for Contruction||3,400,000||10%||340,000|
|Interest on remaining loan upto weighted average expenditure total using weighted average interest rate||2,720,000||8.42%||229024|
|Available Interest||$ 569,024|
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