Question

Pronghorn Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,097,420 on December 31. Pronghorn Company borrowed $1,050,550 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,080,800 note payable and an 11%, 4-year, $3,831,200 note payable. Compute the weighted-average interest rate used for interest capitalization purposes. (Round answer to 2 decimal places, e.g. 7.58%.)

Answer 1

Answer:

The interest rate for capitalization purposes will be of 11%

Explanation:

The company will average all the debt oustanding during the year

1,050,550  x 13%   =     136,571.5

2,080,800 x 10%   =   208,080

3, 831,200  x  11%   =  421, 432  

6,962,550‬                 766,083.5

a debt of 6,962,550 dollars generates 766,083.5 dollars of interest:

principal x rate = interest

rate = interest / principal

766,083.5 / 6,962,550 = 0,110029 = 11%