Question

Sandhill Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,908,000 on March 1, $1,308,000 on June 1, and $3,010,600 on December 31.

Sandhill Company borrowed $1,015,500 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,195,200 note payable and an 11%, 4-year, $3,604,500 note payable. Compute avoidable interest for Sandhill 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.)

Avoidable interest $

Answer 1

Compute interest to be capitalized using Weighted Average:

Step 1: Calculate Average Accumulated Expenditures (AAE)

AAE= ($1,908,000)(10/12 months) + ($1,308,000)(7/12 months) + ($3,010,600)(0/12 months) =

$1,590,000+ $763,000 + $0= $2,353,000

Step 2: Calculate Avoidable Interest

(AAE)(Interest Rate)

[(13/100)($1,015,500)+(10/100)($2,195,200)+(11/100)($3,604,500)]/ [$1,015,500+$2,195,200+$3,604,500]=($748,030/$6,815,200)(100) = 10.97%

Total Avoidable Interest = (10.97/100)($2,353,000)= $258,124.

Step 3: Capitalize the lessor of the Avoidable Interest of Actual Interest

Actual Interest:

($1,015,500*13%) +($2,195,200*10%) +($3,604,500*11%) =$748,030.

Lessor of the Avoidable Interest $258,124 or Actual Interest $748,030.