Question

Pearl Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,028,000 on March 1, $1,308,000 on June 1, and $3,091,450 on December 31. Pearl Company borrowed $1,082,890 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,243,100 note payable and an 11%, 4-year, $3,364,500 note payable. Compute the weighted average interest rate used for interest capitalization purposes. (Round answer to 2 decimal places, e.g. 7.58%.) Weighted-average interest rate

Answer 1

Debt type	Principal amount		Interest rate		Interest
10% 5-year note	2243100	x	10%	=	224310
11% 4-year note	3364500	x	11%	=	370095
Total	5607600				594405

Weighted-average interest rate = Total interest / Total principal = 594405 / 5607600 = 10.60%

Note: $1,082,890 borrowed on March 1 on a 5-year, 13% note will not be considered in calculating weighted-average interest rate because it is borrowed specifically for construction purpose.