Question

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

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.)

Homework Answers

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
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