Question

Teal Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,420,000 on March 1, $2,280,000 on June 1, and $5,700,000 on December 31. Teal Company borrowed $1,900,000 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, $3,800,000 note payable and an 11%, 4-year, $6,650,000 note payable. Compute avoidable interest for Teal Company. Use the weighted-average interest rate for interest capitalization purposes

Answer 1

Answer:

$418,790

Explanation:

Computation for the avoidable interest for Teal Company using the weighted-average interest rate for interest capitalization purposes

First step is to calculate the Expenditure for the year

Expenditure for the year

Mar-01 $3,420,000*10/12=$2,850,000

Jun-01 $2,280,000 *7 12=$1,064,000

Dec-31 $5,700,000*0/ 12=$ -

Total $ 11,400,000 $3,914,000

Second step is to compute the Weighted Average rate of all debt

Weighted Average rate of all debt:-

$3,800,000*12%=$456,000

$6,650,000*11%=$731,500

Total $10,450,000 $1,187,500

Weighted Average rate of all debt=($1,187,500 / $10,450,000)

Weighted Average rate of all debt = 11.36%

Now let compute the avoidable interest

AVOIDABLE INTEREST

$3,914,000

Less:$1,900,000*10%=$190,000

Balance$ 2,014,000*11.36% =$228,790

($3,914,000-$1,900,000=$ 2,014,000)

Avoidable Interest =$418,790

($190,000+$228,790)

Therefore the avoidable interest for Teal Company using the weighted-average interest rate for interest capitalization purposes will be $418,790