Question

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

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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