Question

Bramble Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,049,200 on January 1, 2017. Bramble expected to complete the building by December 31, 2017. Bramble has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,986,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,612,700 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,005,400 Incorrect answer. Your answer is incorrect. Try again. Assume that Bramble completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,240,800, and the weighted-average amount of accumulated expenditures was $3,806,600. Compute the avoidable interest on this project.

Answer 1

Answer :

Avoidable interest = $427,298.28

Explanation :

With the help of following steps we can calculate the avoidable interest on this project :

Interest payable on short term loan = $1,612,700 ×  10% = $161,270

Interest payable on long term loan = $1,005,400 × 11% = $110,594

Therefore,

Weighted average interest rate = ($161,270 + $110,594) ÷ ($1,612,700 + $1,005,400) × 100

= 10.38%

Now

Avoidable interest is

= [$1,986,000 ×  12%] + [($3,806,600 - $1,986,000) 10.38%]

= $427,298.28