Question

On March 1, Tony Co. began construction of a small building. The following expenditures were incurred for construction:

March 1	$96,000		April 1	$82,000
May 1	$170,000		June 1	$300,000
July 1	$90,000

The building was completed and occupied on July 1. To help pay for construction, $80,000 was borrowed on March 1 on a 14%, three-year note payable. The only other debt outstanding during the year was a $550,000, 12% note issued two years ago. Calculate the avoidable interest.

Answer 1

Solution:

Avoidable interest = $12,183.

Calculations:

From the given data first we need to calculate the weighted-average accumulated expenditures.

Date	Expenditure	*	Capitalization period	=	weighted-average accumulated expenditures
Mar 1	$96,000	*	4/12	=	$32,000
Apr 1	$82,000	*	3/12	=	$20,500
May 1	$170,000	*	2/12	=	$28,333
Jun 1	$300,000	*	1/12	=	$25,000
Jul 1	$90,000	*	0/12	=	$0
weighted-average accumulated expenditures					$105,833

.

Now we calculate the avoidable interest.

weighted-average accumulated expenditures	Rate	Avoidable interest
$80,000	12%	$9,600
$25,833	10%	$2,583
$105,833		$12,183