Pronghorn Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,080,000 on March 1, $720,000 on June 1, and $1,800,000 on December 31.
Pronghorn Company borrowed $600,000 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 10%, 5-year, $1,200,000 note payable and an 11%, 4-year, $2,100,000 note payable. Compute avoidable interest for Pronghorn Company. Use the weighted-average interest rate for interest capitalization purposes.
Avoidable Interest:
Calculation of Weighted average expenditure
| Date | Expenditure | * | Weight | = | Weighted average expenditure |
| March 1 | $1080000 | * | 10/12 | = | $900000 |
| June 1 | 720000 | * | 7/12 | = | 420000 |
| December 31 | 1800000 | * | 12/12 | = | - |
| Weighted average expenditure | $1320000 | ||||
Calculation of Weighted average interest rate
| Outstanding debt | Amount | Interest rate | Interest | ||
| 10%, Note payable | $1200000 | * | 10% | = | $120000 |
| 11%, Note payable | 2100000 | * | 11% | = | 231000 |
| 3300000 | $351000 |
Weighted average interest rate= $351000*100/3300000= 10.64%
| Average | Interest Rate | Avoidable Interest | |||
| Average accumulated expenditure | $1320000 | ||||
| Construction loan | 600000 | * | 10% | = | $60000 |
| Other loans(1320000-600000 ) | 720000 | * | 10.64% | = | 76608 |
| $136608 |
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