Question

Blue Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,812,000 on March 1, $1,212,000 on June 1, and $3,014,300 on December 31. Blue Company borrowed $1,070,800 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, $2,030,800 note payable and an 11%, 4-year, $3,170,100 note payable. Compute avoidable interest for Blue Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal places, e.g. 5,275.)

Answer 1

Computaion of weighted average expenditure
Date	expenditure	period	weighted average accumulated expenditure
01-Mar	1812000	10 month	1510000
01-Jun	1212000	4 month	404000
31-Dec	3014300	0 month	0
	6038300		1914000
Compuation of weighted average interest rate
Debt		Principal	interest rate	interest
10% notes payable		2030800	10%	203080
11% notes payable		3170100	11%	348711
		5200900		551791
weighted average interest rate will be = 551791/5200900
weighted average interest rate = 10.61%
Computation of avoidable interest
expenditure-accumulated		rate of interest	avoidable interest
1070800		12%	128496
(1914000-1070800)=843200		10.61%	89463.52
Avoidable interest			217960