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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