Question

Waterway Industries is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6390000 on March 1, $5300000 on June 1, and $8250000 on December 31. Waterway Industries borrowed $3170000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6410000 note payable and an 11%, 4-year, $12750000 note payable.

What is the weighted-average interest rate used for interest capitalization purposes?

Answer 1

Weighted Average interest rate for capitalisation purpose=(Total interest/Total amount of General Borrowings)=10.67%

Workings:-

Source of Finance	Amt. of General Borrowings in $ (A)	Interest Rate (B)	Interest amount (A*B)
10% Note payable	6410000	10%	641000
11% Note payable	12750000	11%	1402500
Total	19160000		2043500

NOTE:- Since 12 % Note payable borrowed for 5 year is taken specifically to help finance construction of the building, hence its amount should be treated as specific borrowing and will not be included for calculating weighted average interest rate. Its interest will be computed and capitalised specifically.