Question

Carla Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $4,500,000 on March 1, $3,000,000 on June 1, and $7,500,000 on December 31. Carla Company borrowed $2,500,000 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, $5,000,000 note payable and an 11%, 4-year, $8,750,000 note payable. Compute avoidable interest for Carla Company.Use the weighted-average interest rate for interest capitalization purposes.

Answer 1

Answer:
Date	Expenditures (A)	Capitalisation period (B)	weighted Average expenditure (A x B)
March 1	$ 4,500,000	10 /12	$ 3,750,000
June 1	$ 3,000,000	7 /12	$ 1,750,000
December 31	$ 7,500,000	0/ 12	$ 0
	$ 15,000,000		$ 5,500,000

Particulars	Amount	Rate	Interest
12% Note payable	$ 5,000,000	12%	$ 600,000
11% Note payable	$ 8,750,000	11%	$ 962,500
Total	$ 13,750,000		$ 1,562,500
	Weigted average interest rate =	$ 1,562,500 / $ 13,750,000	11.36%

	Amount	Interest rate	Avoidable Interest
Loan Borrowed	$ 2,500,000	10%	$ 250,000
Other loan ($ 5,500,000 (-) $ 2,500,000)	$ 3,000,000	11.36%	$ 340,800
	$ 5,500,000	Avoidable Interest	$ 590,800