Question

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.)

Answer 1

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