Question

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.

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