Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2016 $2,000,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,400,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,000,000
Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.
Ans- Computation of Avoidable interest:
Weighted Average
| Accumulated Expenditures | * | Interest Rate | = | Avoidable Interest |
| $2,000,000 | 12% | $240,000 | ||
| $1,600,000 | 10.42% | $166,720 | ||
| $3,600,000 | $406,720 |
| Weighted- Average Interest rate Computation | Pricipal | Interest |
| 10% short-term loan | $1,400,000 | $140,000 |
| 11% long-term loan | $1,000,000 | $110,000 |
| $2,400,000 | $250,000 |
| $250,000/$2,400,000*100 | 10.42% |
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