Question

Martinez Company is constructing a building Construction began on February 1 and was complieted on December 31. Expenditures were $1,824,000 on March 1 , $1,224,000 on June 1, and $3,015,000 on Hartner Company borrowed ",051.700 on March 1 on a 5-year, 12% note to help finance construction of the balding. In addition, the company had outstanding au year 10% interest for Martnez Company. Use the weighted-average interest rate for interest capitalization purposes. (Round answer to 0 decimal places, e.g. 5,275)

Answer 1

SOLUTION

Avoidable Interest is as calculated below:

Date	Amount ($)	Months outstanding	Average Investment
Mar-01	1,824,000	10	1,520,000
Jun-01	1,224,000	7	714,000
Dec-31	3,015,000	0	0
			2,234,000

Weighted Average Interest rate-

Note Outstanding	Interest	Principal
2,132,100*10%	213,210	2,132,100
3,215,000*11%	353,650	3,215,000
	566,860	5,347,100

Weighted Average Interest rate = 566,860/ 5,347,100 = 10.60%

Total Interest Exp-

1,051,700*12%	126,204
(2,234,000-1,051,700)*10.60%	125,324
Avoidable Interest	251,528