Question

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?

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