Question

Bridgeport Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,992,000 on March 1, $1,272,000 on June 1, and $3,046,000 on December 31. Bridgeport Company borrowed $1,116,000 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 9%, 5-year, $2,383,000 note payable and an 10%, 4-year, $3,634,300 note payable. Compute avoidable interest for Bridgeport Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal places, e.g. 5,275.)

Answer 1

first let us know the weighted average expenditure:

actual amount	months used	annualised amount
1,992,000	10 months	(1992,000*10/12)=1,660,000
1,272,000	7 months	(1,272,000*7/12)=>742,000
3,046,000	0	0
	weighted average expenditure	2,402,000

now,

interest rate on specific loan = 13%.

weighted interest on other loans:

amount of loan	interest rate	interest amount
2,383,000	9%	214,470
3,634,300	10%	363,430
6,017,000	total	577,900

average rate of interest = 577,900 / 6,017,000 =>9.60%

avoidable interest calculation:

weighted average expenditure is 2,402,000.

interest on specific portion (1,116,000*13%)	145,080
interest on remainder of loan (2,402,000-1,116,000)*9.60%	123,456
total avoidable interest	268,536