Question

Sandhill Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,700,000 on March 1, $1,800,000 on June 1, and $4,500,000 on December 31.

Sandhill Company borrowed $1,500,000 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 12%, 5-year, $3,000,000 note payable and an 11%, 4-year, $5,250,000 note payable. Compute avoidable interest for Sandhill 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

Weighted-Average Accumulated Expenditure:
Date. Amount. Capitalization Pd. WAAE

March 1 = $2700000 x 10/12 = $2250000
June 1 = $1800000 x 7/12 = $1050000
Dec. 31 = $4500000 x 0 = $0
Total = $3300000


Weighted-Average Interest Rate:
12% 5-year note x $3000000 = $360000
11% 4-year note x $5250000 = $577500

Total Principal= $3000000 + $5250000 = $8250000
Total Interest = $360000 + $577500 = $937500

WA-Interest Rate: $937500/$8250000 = 11.36%

Avoidable Interest:
WAAE x Interest Rate = Avoidable Interest
$1500000 x 10% =$150000
$150000 x 11.36% = $17050
total Avoidable Interest = $167050