Question

# WildhorseFurniture Company started construction of a combination office and warehouse building for its own use at...

WildhorseFurniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \$11,000,000 on January 1, 2020. Wildhorse expected to complete the building by December 31, 2020. Wildhorse has the following debt obligations outstanding during the construction period.

 Construction loan-12% interest, payable semiannually, issued December 31, 2019 \$4,400,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 3,080,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,200,000

(a)

Assume that Wildhorse completed the office and warehouse building on December 31, 2020, as planned at a total cost of \$11,440,000, and the weighted-average amount of accumulated expenditures was \$7,920,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, e.g. 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.)

 Note Payable Amount x Interest Rate Interest Short-term loan \$ 3,080,000 x 10% \$ 308,000 Long-term loan \$ 2,200,000 x 11% \$ 242,000 Total \$ 5,280,000 x \$ 550,000 Weigted average interest rate     = \$ 550,000 / \$ 5,280,000 10.42% Avoidable Interest         =   ( \$ 4,400,000 x 12% ) + ( \$7,920,000 (-) \$ 4,400,000) x 11.36%         =    \$ 528,000 +   (\$ 3,520,000 x 10.42% )         =     \$ 528,000 + \$ 366,784 \$ 894,784

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