Question

Riverbed Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $4,320,000 on March 1, $2,880,000 on June 1, and $7,200,000 on December 31. Riverbed Company borrowed $2,400,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $4,800,000 note payable and an 11%, 4-year, $8,400,000 note payable. Compute avoidable interest for Riverbed Company. Use the weighted-average interest rate for interest capitalization purposes.

Answer 1

Answer:

total capitalized interests = $572,727

Explanation:

weighted expenditures:

$4,320,000 x 10/12 = $3,600,000

$2,880,000 x 7/12 = $1,680,000

$7,200,000 x 0/12 = $0

total = $5,280,000

$2,400,000 x 10/12 x 10% = $200,000

Capitalized interests = $200,000 (for $2,000,000)

weighted interests

$4,800,000 x 12/12 x 12% = $576,000

$8,400,000 x 12/12 x 11% = $924,000

weighted interest rate = $1,500,000 / $13,200,000 = 11.36%

Capitalized interests = ($5,280,000 - $2,000,000) x 11.36% = $372,727

total capitalized interests = $572,727