Question:
Riverbed Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,400,000 on March 1, $3,600,000 on June 1, and $9,000,000 on December 31. Riverbed Company borrowed $3,000,000 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 10%, 5-year, $6,000,000 note payable and an 11%, 4-year, $10,500,000 note payable. Compute avoidable interest for Riverbed Company. Use the weighted-average interest rate for interest capitalization purposes.
Answer:
The total avoidable interest is $743,040.00
Explanation:
Here we have         
Date         Expenditure              Period         Portion
Mar-01     $5,400,000.00         10/12    	$4,500,000.00
Jun-01     $3,600,000                7/12             $2,100,000
Dec-31    $9,000,000                0/12            $0
Total                                                               $6,600,000.00
The weighted average expenditure is  $6,600,000.00
The weighted average rate using the notes payable loan is found by the following calculation
Type of loan	Amount             Interest rate	Interest incurred
Loan               $6,000,000             10%            $600,000.0
Loan               $10,500,000            11%             $1,155,000.00
Total              $16,500,000                                $1,755,000.0
Weighted average rate = Total interest incurred / Total loans
Weighted average = 1755000/16500000 = 0.10636 = 10.64%
The general interest is found by subtracting the specific loan from the weighted average expenditure 
General = Weighted average expenditure - Specific loan
General =  $6,600,000.00 - $3,000,000 = $3,600,000.00
The avoidable interest is found  by summing the specific interest to the weighted average interest as follows
Type of loan    Amount            Interest rate	Interest incurred
Specific            $3,000,000  	12%  	$360,000.00
General            $3,600,000  	10.64%	$383,040.0000
Total                                                               $743,040.00
The total avoidable interest = $743,040.00