Question

Martinez Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,620,000 on March 1, $1,080,000 on June 1, and $2,700,000 on December 31.

Martinez Company borrowed $900,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $1,800,000 note payable and an 11%, 4-year, $3,150,000 note payable. Compute avoidable interest for Martinez 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

Answer 1

Solution: The avoidable interest for Martinez Company = $ 212,727

Calculation of Avoidable Interest
Debt	Amount (a)	Interest rate (b)	Interest Amount(a*b)
Specific Debt	$        900,000.00	10.0000%	$                 90,000
Remaining Loan ( $ 1,980,000- $ 900,000)	$    1,080,000.00	11.3636% ( Note: 2)	$               122,727
Total ( Note:1)	$    1,980,000.00		$               212,727

Working Notes:

1)

Calculation of weighted average accumulated expenditure
Date	Amount (a)	Capitalization Period( Months)(b)	Expenditure ( a*b/12)
Mar. 1	$    1,620,000.00	10	$     1,350,000.00
Jun. 1	$    1,080,000.00	7	$         630,000.00
Dec. 31	$    2,700,000.00	0	$                           -
	$    5,400,000.00		$     1,980,000.00

2)

Calculation of weighted average interest rate
Debt	Amount (a)	Interest rate (b)	Interest Amount (a*b)
12% Note	$    1,800,000.00	12.00%	$         216,000.00
11% Note	$    3,150,000.00	11.00%	$         346,500.00
Total	$    4,950,000.00		$         562,500.00

weighted average interest rate = ( $ 562,500 / $ 4,950,000) * 100 = 11.3636 %