Question

Crane Company is constructing a building. Construction began on February 1 and was completed on December...

Crane Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,220,000 on March 1, $3,480,000 on June 1, and $8,700,000 on December 31. Crane Company borrowed $2,900,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 14%, 5-year, $5,800,000 note payable and an 11%, 4-year, $10,150,000 note payable. Compute avoidable interest for Crane Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.) Avoidable interest $enter the avoidable interest in dollars rounded to 0 decimal places

what is the aviodable interest?

Homework Answers

Answer #1
Principal Interest
14%, 5-year 5,800,000 812,000
11%, 4-year 10,150,000 1,116,500
Total 15,950,000 1,928,500
Weighted-average interest rate = 1,928,500 / 15,950,000= 12.0909 %
Schedule of Weighted-Average accumulated expenditure
Date Amount Current year capitalization period Weighted Average Accumulated Expenditures
1-Mar $5,220,000 10/12 $4,350,000
1-Jun $3,480,000 7/12 $2,030,000
31-Dec $8,700,000 0/12 $0.00
$6,380,000

Avoidable interest = [2,900,000 *12 /100 *10/12 ] + [(6,380,000 - 2,900,000) *12.0909/100]

Avoidable interest = 290,000+420763 = 710,763

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