Question

15 On January 1, 2020, Southtree Co. began construction of a building to be used as its office headquarters. The building is expected to be completed on December 31, 2020. Expenditures on this project during 2020 were as follows: January $100,000 March 1 360,000 June 15 270,000 October 31" 153,000 On Jan. 1, 2020, the company obtained a $500,000 specific construction loan with a 6% interest rate. The loan was outstanding during the entire construction period. The company's other interest-bearing debts included two long-term notes of $400,000 and $700,000 with interest rates of 8% and 10%, respectively. Both notes were outstanding during the entire construction period. Instruction: (a) Determine the amount of interest capitalized for 2020. Please show your work (i.. WA accumulated expenditure, actual interest, WA interest rate, and avoidable interest) to support your final answer. Please round the WA interest rate to the 4th decimal place when necessary. Answer: The amount of interest capitalized for 2020 is (b) Regardless of your answer in (a), determine the amount of avoidable interest for 2020 assuming that the WA accumulated expenditure is $460,000 (other things being equal).

Answer 1

Answer:

Step 1 Workings: Notes 1: 400000 x 8 % = 32000 Notes 2: 700000 x 10% = 70000 Total principal Amount = 110000 Total Interest Amount = 32000 + 70000 = 102000 WACC: (102000 / 110000) x 100 = 9.7272%

Step 2 A) Amount of Interest capitalized for 2020: Date Expenditure Cumulative Total number of days Interest rate WACC Jan-01 100000 100000 601 6% Mar-01 360000 460000 92 6% Jun-01 270000 730000 152 6% 9.2727% Oct-31 153000 883000 61 6% 9.2727% 365 Total Interest 986.3014 6956.7123 21374.6451 10949.0062 40266.665 Amount of Interest capitalized for 2020 is $ 40266.665 Step 3 B) Amount of Avoidable interest for 2020: Weighted average accumulated expenditure is $ 460000 Rate of Interest is 6% = 460000 x 6% = 27600 Avoidable interest for 2020 is $ 27600