Question

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2020. Harrisburg expected to complete the building by December 31, 2020. Harrisburg has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $2,000,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 1,400,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,000,000 Assume that Harrisburg completed the office and warehouse building on December 31, 2020, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project

Answer 1

Answer:

$406,720

Explanation:

Calculating weighted average interest rate for 10% short term loan and 11% for long term loan:

Interest rate payable in 2014 on short term loan = $1,400,000 * 10% = $140,000

Interest rate payable in 2014 on long term loan = $1,000,000 * 11% = $110,000

Weighted average interest rate = $140,000 + $110,000 / $1,400,000 + $1,000,000 * 100

Weighted average interest rate = 0.10416666

Weighted average interest rate = 10.42%

Calculating avoidable interest:

Avoidable interest = [$2,000,000*12%] + [($3,600,000 - $2,000,000) * 10.42%]

Avoidable interest = $240,000 + $166,720

Avoidable interest = $406,720