Question

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,920,000 on March 1, $1,248,000 on June 1, and $3,058,100 on December 31.
Hanson Company borrowed $1,059,300 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, $2,480,400 note payable and an 11%, 4-year, $3,566,400 note payable. Compute avoidable interest for Hanson Company. Use the weighted-average interest rate for interest capitalization purposes.
Avoidable Interest?

Answer 1

Answer:

Avoidable interest is $272,064.

Explanation:

Compute the interest on new notes payable, using the equation as shown below:

Interest = Principalof 13% note payable × Rate of interest

=$1,059,300×13%

=$137,709

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Hence, the interest of new notes payable is $137,709.

Compute the interest of outstanding notes payable using the equation as follows:

Interest = Outstanding principal × Weighted average interest rate

=$1,268,700×10.59%

=$134,355

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Hence, the interest of outstanding principal which is needed to be considered for the calculation of avoidable interest is $134,355

Avoidable interest is $272,064.