Question

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $4,800,000 on March 1, $3,960,000 on June 1, and $6,000,000 on December 31. Arlington Company borrowed $2,400,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable.What is the weighted-average interest rate used for interest capitalization purposes? a. 11% b. 10.85% c. 10.5% d. 10.65%What is the avoidable interest for Arlington Company? a. $288,000 b. $927,615 c. $328,562 d. $704,415What is the actual interest for Arlington Company? a. $1,758,000 b. $1,782,000 c. $1,470,000 d. $704,415What amount of interest should be charged to expense? a. $765,584 b. $1,470,000 c. $1,053,585 d. $830,384

Answer 1

Answer:

b. 10.65%

capitalized interest

d. $704,415

actual interest

a. $1,758,000

interest expense

c. $1,053,585

Explanation:

the average cost of debt for general funds:

4,800,000 x 10% = 480,000

9,000,000 x 11% = 990,000

13,800,000            1,470,000

1,470,000 / 13,800,000 = 10.65%

capitalized fund:

4,800,000 x 10/12= 4,000,000‬

3,960,000 x 7/12 = 2,310,000

total                         6,310,000

specifit borrowing: 2,400,000 x 12% = 288,000

remainder              3910000 x 10.65% = 416,415

                                     capitalized cost 704,415

actual interest:

1,470,000 + 288,000 = 1,758,000

interest expense

1,758,000 - 704,415 = 1,053,585

Answer 2

The weighted-average interest rate used for interest capitalization purposes is d. 10.65%

The avoidable interest for Arlington Company is d. $704,415

What is the actual interest for Arlington Company is a. $1,758,000

The amount of interest should be charged to expense is c. $1,053,585

Explanation:

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $4,800,000 on March 1, $3,960,000 on June 1, and $6,000,000 on December 31. Arlington Company borrowed $2,400,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable.

What is the weighted-average interest rate used for interest capitalization purposes?  

a. 11%

b. 10.85%

c. 10.5%

d. 10.65%

The weighted average interest rate is the aggregate rate of interest paid on all debt. the average cost of debt for general funds:

$4,800,000 * 10 \%= 480,000\\9,000,000 * 11\% = 990,000\\ 4,800,000+ 9,000,000 = 13,800,000\\ 480,000+ 990,000= 1,470,000$

$\frac{1,470,000}{13,800,000} = 10.65\%$

What is the avoidable interest for Arlington Company?

a. $288,000

b. $927,615

c. $328,562

d. $704,415

Avoidable interest is the interest amount that could have been avoided had the project not taken place

$4,800,000 * \frac{10}{12} = 4,000,000\\3,960,000 * \frac{7}{12} = 2,310,000$

$total =4,000,000‬+2,310,000= 6,310,000$

$specifit borrowing: 2,400,000 * 12\% = 288,000\\remainder: 3910000 * 10.65\% = 416,415$

$capitalized cost = 288,000+ 416,415=704,415$

What is the actual interest for Arlington Company?

a. $1,758,000

b. $1,782,000

c. $1,470,000

d. $704,415

The actual interest rate is the rate that will discount all of the future cash receipts back to the amount of cash paid to buy the bond

$= ((4,800,000 *10\%)+ (9,000,000 * 11\%))+ specifit borrowing\\ = 1,470,000 + 288,000\\ = 1,758,000$

What amount of interest should be charged to expense?

a. $765,584

b. $1,470,000

c. $1,053,585

d. $830,384

Interest is the charge for the privilege of borrowing money.

$=actual interest - capitalized cost = \\=1,758,000 - 704,415\\ = 1,053,585$

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