Question

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

$

Answer 1

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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