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 Amount Current year weighted Average Capitalization period Accumulated Expendsture Date C I Mar 6400000 5333333 I Jun 5280 000 .10/12 7112 0/12 3080000 31 Dec 8000000 19680000 8413333

weighted Average Interest rate on general borrowings = 10% X 64/184 +114X1201184 - 10.65% Interest fos Specefic borrowing should be copstalized entire year for Avoidable Interest = [ 3200000X1204.]+8413333 - 3200000/X10.65 = 939220.