Question

John Bast Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1.2 million on March 1, $0.9 million on June 1, and $3 million on December 31. Kingbird Company borrowed $1 million on March 1 on a five-year, 12% note to help finance the building construction. In addition, the company had outstanding all year a $1-million, five-year, 14% note payable and a $3.7-million, four-year, 18% note payable. Calculate the appropriate capitalization rate on general borrowings that would be used for capitalization of borrowing costs. (Round answer to 2 decimal places, e.g. 52.75%.)

Answer 1

Answer: Construction began on February 1 and completed on December 31.

General Borrowings :

$ 1 million,14% note payable

$ 3.7 million ,18% note payable

Weighted average Capitalization rate of General Borrowings that would be used for Capitalization of borrowing cost = (Borrowings*note%)÷Total borrowing amount = ($1000000*14%+$3700000*18%)÷($1000000+$3700000) =(140000+666000)÷4700000

=0.1715 (or) 17.15%

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