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?
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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