Question

Riverbed Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,860,000 on March 1, $1,260,000 on June 1, and $3,016,770 on December 31. Riverbed Company borrowed $1,198,000 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 9%, 5-year, $2,088,000 note payable and an 10%, 4-year, $3,308,700 note payable.
Required:
Compute the weighted-average interest rate used for interest capitalization purposes.

Answer 1

Answer:

9.61%

Explanation:

Computation for the weighted-average interest rate

Using this formula

Weighted-average interest rate=Total Interest amount /Total Principal amount

Particular Principal Interest

9%, 5-year note payable $2,088,000 $187,920

10%, 4-year note payable $3,308,700 $330,870

Total $5,396,700 $518,790

Total Principal amount =$5,396,700

Total Interest amount =$518,790

Let plug in the formula

Weighted-average interest rate=$518,790/$5,396,700

Weighted-average interest rate=0.0961*100

Weighted-average interest rate=9.61%

Therefore Weighted-average interest rate is 9.61%