Question

Windsor Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,908,000 on March 1, $1,308,000 on June 1, and $3,002,130 on December 31. Windsor Company borrowed $1,197,510 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 10%, 5-year, $2,487,900 note payable and an 11%, 4-year, $3,271,400 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Answer 1

Answer:

interest capitalized on building: 221,187.85‬ dollars

Explanation:

average payment:

from March 1st to December 31th:

1,908,000 x 10/12 = 1,590,000

from June 1st to December 31th:

1,308,000  x 6 / 12 = 654,000

Total: 2,244,000

weighted average rate:

2,487,900 x 10% =  248,790

3,271,400   x 11% =  359,854

total interest           608,644

total borrowing    5,759,300

average rate:         0.105680 = 10.57%

avoidable interest:

construction related debt:

1,197,510 x 12% x 9/12         = 119,751

debt subject to other debt instrument

2,244,000 - 1,197,510          = 1,046,910

1,046,910 x 10.57 % x 11/12  = 101,436.85

total avoidable interest: 119,751 + 101,436.85 = 221,187.85‬