Question

Teal Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $4,680,000 on March 1, $3,120,000 on June 1, and $7,800,000 on December 31.

Teal Company borrowed $2,600,000 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 12%, 5-year, $5,200,000 note payable and an 11%, 4-year, $9,100,000 note payable. Compute avoidable interest for Teal Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.)

Avoidable interest

$enter the avoidable interest in dollars rounded to 0 decimal places

Answer 1

Payment	Fund Used		Annualised
1-march 4680000	10 months	4680000*10/12	3900000
1-june 3120000	7 months	3120000*7/12	1820000
31-Dec 7800000	0 months	7800000*0/12	0
TOTAL			5720000

2.

	Loan		Int
Loan specifically for building	2600000	12%	2600000*12% = 312000
Other Loans
5-year note payable	5200000	12%	5200000*12% = 624000
4-year note payable	9100000	11%	9100000*11% = 1001000
TOTAL	14300000		1625000

So, Weighted average for other loans 1625000/14300000*100 = 11.36%

Weighted Average Qualifying above (as above): 5720000

Interest on loan specifically for building (ie, 2600000): 312000

On Balance of qualifying loan @ 11.36%: (5720000-2600000)*11.36% = 354432

Total Avoidable Interest: 312000+354432 = 666432

Total Interest incurred by the company => 312000+1625000 = 1937000

Capitalize lower of Avoidable Interest OR Total Interest. So 666432.