Question

Stellar Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,040,000 on March 1, $3,360,000 on June 1, and $8,400,000 on December 31.

Stellar Company borrowed $2,800,000 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 8%, 5-year, $5,600,000 note payable and an 11%, 4-year, $9,800,000 note payable. Compute avoidable interest for Stellar Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 2.5125 and final answer to 0 decimal places, e.g. 5,275.)

What is Avoidable Interest?

Answer 1

	Avoidable Interest	$                 6,68,976
	Workings:
	Expenditure for the year
	Mar-01	$              50,40,000	X	10 / 12	=	$ 42,00,000
	Jun-01	$              33,60,000	X	7 / 12	=	$ 19,60,000
	Dec-31	$              84,00,000	X	0 / 12	=	$                -
		$           1,68,00,000				$ 61,60,000
	Interest Capitalized
	$                61,60,000
Less:	$                28,00,000	X	12.00%		=	$   3,36,000
Balance	$                33,60,000	X	9.91%		=	$   3,32,976
	Interest Capitalized				=	$   6,68,976
	Weighted Average rate of all debt:-
		$              56,00,000	X	8%	=	$   4,48,000
		$              98,00,000	X	11%	=	$ 10,78,000
		$           1,54,00,000				$ 15,26,000
		Weighted Average rate of all debt =				9.91%
		($1526000 / $15400000)

Answer 2

Thank you. However, you should probably swap the WAR of all debt (WAR) and Interest Capitalized  (IC) as the WAR comes before the IC.