Question

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3. (7 points) On March 1, Mocl Co. began construction of a small building. The following expenditures were incurred for construction: March 1 $ 225,000 April 1 $ 222,000 May 1 540,000 June 1 810,000 July 1 300,000 The building was completed and occupied on July 1. To help pay for construction $150,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $1,500,000, 10% note issued two years ago. Instructions (a) Calculate the weighted-average accumulated expenditures. (b) Calculate avoidable interest.

Answer 1

In the books of Mocl Co.
a) Weighted average accumulated expenditure
Weight has been assigned in proportion to period of capitalization The asset construction was started on March 1 and completed on July 1,hence, total period is 4 months.Treating the 4 months with weightage of 1, we will assign the weights to the capital expenses based on when they were incurred.
Payment Date	Expenditure	Capitalization Period	Weight	Weighted Expenditure (Expenditure * Weight)
Mar-1	$225,000	4 months	1.00	$225,000
Apr-1	$222,000	3 months	0.75	$166,500
May-1	$540,000	2 months	0.50	$270,000
June-1	$810,000	1 month	0.25	$202,500
July-1	$300,000	0 month	-	$0
Weighted average accumulated expenditure				$864,000
b) Avoidable interest
Weighted average capital expenditure				$864,000
Financed through specific loan(given)				$150,000
Financed through General loan( balance value)				$714,000
Computation of avoidable interest cost
Avoidable interest would be the interest cost incurred during the period of capitalization,i.e, 4 months
Funding	Amount	Rate	Annual Interest	Avoidable Interest (Annual Int*4/12)
Specific	$150,000	12%	$18,000	$6,000
General	$714,000	10%	$71,400	$23,800
	$864,000		$89,400	$29,800
Avoidable interest is the interest during the capitalization
period which is four months