Question

Oriole Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,060,000 on March 1, $2,040,000 on June 1, and $5,100,000 on December 31.

Oriole Company borrowed $1,700,000 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, $3,400,000 note payable and an 11%, 4-year, $5,950,000 note payable. Compute avoidable interest for Oriole 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.)

Answer 1

ORIOLE COMPANY
COMPUTATION OF WEIGHTED-AVERAGE ACCUMULATED EXPENDITURE:
Date	Amount($)	Capitalization   WAAE(AMOUNT ($)
Mar-01	$3,060,000*10/12	25,50,000.00
Jun-01	$2,040,000*7/12	11,90,000.00
Dec-31	$5,100,000*0	-
		37,40,000.00
WEIGHTED-AVERAGE INTEREST RATE:
12% 5-year note x $3400000	= $408000
11% 4-year note x $5950000	= $654500
Total Principal= $3400000 + $5950000 = $9350000
Total Interest = $408000 + $654500 = $1062500
WA-INTEREST RATE	1062500/9350000	11.36%
COMPUTATION OF AVOIDABLE INTEREST:
WAAE X INTEREST RATE = AVOIDABLE INTEREST
$1,700,000*10%	1,70,000.00
$2,040,000*11.36%	2,31,744.00
TOTAL AVOIDABLE INTEREST	4,01,744.00