Question

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, $5,280,000 on June 1, and $8,000,000 on December 31. Arlington Company borrowed $3,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable. What is the avoidable interest for Arlington Company?

Answer 1

Solution:

Construction of Building - Arlington Company
Schedule of Weighted-Average accumulated expenditure
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
1-Mar	$6,400,000.00	10/12	$5,333,333
1-Jun	$5,280,000.00	7/12	$3,080,000
31-Dec	$8,000,000.00	0/12	$0
	$19,680,000.00		$8,413,333

Weighted average interest rate on general borrowings = 10% * 64/184 + 11%*120/184 = 10.65%

Interest for specific borrowing should be capitalized for entire year.

Avoidable interest = ($3,200,000*12%) + ($8,413,333 - $3,200,000) * 10.65%

= $939,220