Question

Headland Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,960,000 on March 1, $2,640,000 on June 1, and $6,600,000 on December 31.

Headland Company borrowed $2,200,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $4,400,000 note payable and an 11%, 4-year, $7,700,000 note payable. Compute avoidable interest for Headland 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.)

Answer 1

Date	Expenditures (A)	Capitalisation period (B)	weighted Average Expenditure (A x B)
March 1	$ 3,960,000	10 /12	$ 3,300,000
June 1	$ 2,640,000	7 /12	$ 1,540,000
December 31	$ 6,600,000	0 / 12	$ 0
	$ 13,200,000		$ 4,840,000

	Amount	Interest Rate	Interest
12 % Note payable	$ 4,400,000	12%	$ 528,000
11% Note payable	$ 7,700,000	11%	$ 847,000
Total	$ 12,100,000		$ 1,375,000
	Weigted average interest rate     = Total Interset / Total Note Amount     =   $ 1,375,000 / $ 12,100,000		11.36%
	Amount	Interest rate	Avoidable Interest
Loan Amount	$ 2,200,000	10%	$ 220,000
Other loan ($ 4,840,000 (-) $ 2,200,000)	$ 2,640,000	11.36%	$ 299,904
	Avoidable Interest =		$ 519,904