Question

Sweet Company is constructing a building. Construction began on February 1 and was completed on December...

Sweet Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,780,000 on March 1, $2,520,000 on June 1, and $6,300,000 on December 31.

Sweet Company borrowed $2,100,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $4,200,000 note payable and an 11%, 4-year, $7,350,000 note payable. Compute avoidable interest for Sweet Company. Use the weighted-average interest rate for interest capitalization purposes.

Homework Answers

Answer #1
Date Amount Time Weighted-Average Expenditures
Mar-01 3780000 10/12 3150000
Jun-01 2520000 7/12 1470000
Dec-31 6300000 0 0
4620000
Weighted-average accumulated expenditure=4,620,000
2
Principal Interest
12%, 5-year 4200000 504,000
11%, 4-year 7350000 808,500
Total 11,550,000 1,312,500
Weighted-average interest rate = 1,312,500/11,550,000=11.36%

Weight avarage qualifing loan= 4620000

int on specific loan=2100000*10%= 210000

interest on remainder of loan

=(4620000-2100000)*11.36%

=286,272

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