Question

Flint Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,960,000 on March 1, $2,640,000 on June 1, and $6,600,000 on December 31. Flint Company borrowed $2,200,000 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, $4,400,000 note payable and an 11%, 4-year, $7,700,000 note payable. Compute avoidable interest for Flint 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 is?

Answer 1

Answer : Avoidable interest = $563,904

Explanation:

Computation of Weighted-Average Accumulated Expenditure

$3,960,000 * 10/12	$3,300,000
$2,640,000 * 7/12	$1,540,000
$6,600,000 * 0	$0
Weighted-Average Accumulated Expenditure	$4,840,000

	Principal	Interest
12%, 5-year Note	$4,400,000	$4,400,000 * 12% = $528,000
11%, 4-year Note	$7,700,000	$7,700,000 * 11% = $847,000
Total	$12,100,000	$1,375,000

Weighted-Average Interest Rate = $1,375,000 / $12,100,000 = 0.1136 or 11.36%

Computation of Avoidable Interest

$2,200,000 * 12%	$264,000
($4,840,000 - $2,200,000) * 11.36%	$299,904
Avoidable Interest	$563,904