Question

V Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,420,000 on March 1, $2,280,000 on June 1, and $5,700,000 on December 31.

V Company borrowed $1,900,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $3,800,000 note payable and an 11%, 4-year, $6,650,000 note payable. Compute avoidable interest for V Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.)

Avoidable interest= ?

Answer 1

Computation of weighted average Accumulated expenses:
Date	Amount	Capitalization period	weighted average Accumulated expenses
Mar-01	3420000	(10/12)	2850000
Jun-01	2280000	(07/12)	1330000
Dec-31	5700000	0	0
	11400000		4180000
Computation of capitalization rate:
	Principal	Interest
12%, 5-Year note	1900000	228000
10%, 5-Year note	3800000	380000
11%, 4-Year note	6650000	731500
	12350000	1339500
Capitalization rate = 1339500/12350000
Capitalization rate = 10.85%
Avoidable interest = Weighted average accumlated exp x interest rate
Avoidable interest = 41,80,000 x 10.85%
Avoidable interest = 4,53,530