Question

Nash Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,240,000 on March 1, $2,160,000 on June 1, and $5,400,000 on December 31.

Nash Company borrowed $1,800,000 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, $3,600,000 note payable and an 11%, 4-year, $6,300,000 note payable. Compute avoidable interest for Nash Company. Use the weighted-average interest rate for interest capitalization purposes

Avoidable interest is: ?

Answer 1

Compute Avoidable Interest? Answer: Weighted Average Interest Rate: Particulars Gross Amount Interest Computation Interest 12%, 5 year note payable $ 3,600,000.00 3,600,000x12% $ 432,000.00 11%, 4 year note payable $ 6,300,000.00 6,300,000x11% $ 693,000.00 $ 9,900,000.00 $ 1,125,000.00 Average Interest Rate 1125000/9900000 11.36% Weighted Average Expenditure: Expenditure Date Computation Average Expenditure $ 3,240,000.00 Mar-01 3,240,000X10/12 $ 2,700,000.00 $ 2,160,000.00 Jun-01 2,160,000x7/12 $ 1,260,000.00 $ 5,400,000.00 Dec-31 5,400,000X0/12 $ $ 3,960,000.00 Interest Capitalised: Expenditure Interest Rate Computation Interest $ 1,800,000.00 10.00% 1,800,000X10% $ 180,000.00 $ 2,160,000.00 11.36% 2,160,000X11.36% $ 245,376.00 Avoidable Interest $ 425,376.00 Avoidable Interest means the interest that have been avoided in case of no expenditure on the asset. Here the asset is building where the above interest of 425,376 will be capitalised that will not be incurred in case the building has not been constructed. Comment in case of any queries in the above solution. A