Question

Indigo Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,836,000 on March 1, $1,236,000 on June 1, and $3,038,370 on December 31.Indigo Company borrowed $1,112,250 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, $2,342,100 note payable and an 10%, 4-year, $3,467,800 note payable. Compute the weighted-average interest rate used for interest capitalization purposes. (Round answer to 2 decimal places, e.g. 7.58%.)

Answer 1

Answer:

A.$2,251,000

B.9.59%

Explanation:

A.Indigo Company

Payment Fund used Annualized

1st March $1,836,000 10/12 $1,530,000

1st June $1,236,000 7/12 $721,000

Total qualifying for interest capitalization 2,251,000

($1,530,000 +721,000)

B.Indigo Company

Specific loan: Funds for project $1,112,250× 12% interest 133,470

Other loans:For the rest:$2,342,100 9%

Interest 210,789

$3,467,800 10%Interest 346,780

$3,467,800 +$2,342,100 =$5,809,900

$346,780 +$210,789=$557,569

Weighted average rate for other loans

=$557,569 /$5,809,900

= 9.59%

Therefore the weighted-average interest rate used for interest capitalization purposes will be 9.59%