Question

ABC Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $7,360,000 on March 1, $6,072,000 on June 1, and $9,200,000 on December 31. ABC Company borrowed $3,680,000 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, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable. What is the avoidable interest for ABC Company?

Answer 1

Answer:

= $939,220

Explanation:

Solution:

Construction of Building - Arlington Company

Schedule of Weighted-Average accumulated expenditure

Date Amount Current year capitalization period Weighted Average Accumulated Expenditures

1-Mar $6,400,000.00 10/12 $5,333,333

1-Jun $5,280,000.00 7/12 $3,080,000

31-Dec $8,000,000.00 0/12 $0

$19,680,000.00 $8,413,333

Weighted average interest rate on general borrowings = 10% * 64/184 + 11%*120/184 = 10.65%

Interest for specific borrowing should be capitalized for entire year.

Avoidable interest = ($3,200,000*12%) + ($8,413,333 - $3,200,000) * 10.65%

= $939,220