Question

Brief Exercise 10-04

Stellar Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,980,000 on March 1, $1,320,000 on June 1, and $3,300,000 on December 31.

Stellar Company borrowed $1,100,000 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 10%, 5-year, $2,200,000 note payable and an 11%, 4-year, $3,850,000 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.)

Avoidable interest

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Thank you, please explain how you did it too!

Answer 1

Answer:

Avoidable Interest is as calculated below:
		Months outstanding	Average Investment
Mar-01	19,80,000	10	16,50,000
Jun-01	13,20,000	7	7,70,000
Dec-31	33,00,000	0	-
			24,20,000
Note Outstanding	Interest	Principal
22,00,000*10%	2,20,000	22,00,000
38,50,000*11%	4,23,500	38,50,000
	6,43,500	60,50,000
Weighted Average Interest rate	10.6364%
(643,500/60,50,000)
Total Interest Exp
11,00,000*12%*	1,32,000
(24,20,000-11,00,000)*10.6364%	1,40,400
Avoidable Interest	2,72,400