Question

Sarasota Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,400,000 on March 1, $3,600,000 on June 1, and $9,000,000 on December 31.

Sarasota Company borrowed $3,000,000 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, $6,000,000 note payable and an 11%, 4-year, $10,500,000 note payable. Compute avoidable interest for Sarasota 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.)

Answer 1

ANSWER:

Calculation of Avoidable Interest

Debt	Amount (A)	Interest rate (B)	Interest Amount (A * B)
Specific Debt	$3,000,000	10%	$300,000
Remaining Loan ($6,600,000 - 3,000,000)	$3,600,000	11.36% (WN 2)	$408,960
Total (WN 1)	$6,600,000		$708,960

The avoidable interest for Sarasota Company = $708,960

Working Notes:

WN 1)

Calculation of weighted average accumulated expenditure

Date	Amount (A)	Capitalization Period (Months) (B)	Expenditure [(A* B) / 12]
Mar 1	$5,400,000	10	$4,500,000
Jun 1	$3,600,000	7	$2,100,000
Dec 31	$9,000,000	0
	$18,000,000		$6,600,000

WN 2)

Calculation of weighted average interest rate

Debt	Amount (A)	Interest rate (B)	Interest Amount (A * B)
12% Note	$6,000,000	12%	$720,000
11% Note	$10,500,000	11%	$1,155,000
Total	$16,500,000		$1,875,000

Weighted average interest rate = (1,875,000 / 16,500,000) * 100 = 11.36%