Part A
Avoidable interest = $1098144
Weighted-Average Accumulated Expenditures |
X |
Interest Rate |
= |
Avoidable Interest |
5400000 |
12% |
648000 |
||
4320000 |
10.42% |
450144 |
||
9720000 |
1098144 |
Weighted-average interest rate computation |
Principal |
Interest |
10% short-term loan |
3780000 |
378000 (3780000*10%) |
11% long-term loan |
2700000 |
297000 (2700000*11%) |
6480000 |
675000 |
Weighted-average interest rate = total interest / total principal = 675000/6480000 = 10.42%
Part B
Depreciation Expense = $477605
Actual interest |
||
Construction loan |
5400000*12% = |
648000 |
Short-term loan |
3780000*10% = |
378000 |
Long-term loan |
2700000*11% = |
297000 |
$1323000 |
Avoidable interest being lower than avoidable interest, avoidable interest is considered to calculate total cost.
Total cost = cost + interest capitalized = 14040000+1098144 = 15138144
Depreciation Expense = (15138144-810000)/30 = $477605
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