Question

Exercise 10-07 (Part Level Submission) Ivanhoe Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,500,000 on January 1, 2020. Ivanhoe expected to complete the building by December 31, 2020. Ivanhoe has the following debt obligations outstanding during the construction period.

Exercise 10-07 (Part Level Submission) Ivanhoe Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,500,000 on January 1, 2020. Ivanhoe expected to complete the building by December 31, 2020. Ivanhoe has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 $1,800,000 1,260,000 900,000 (a) Assume that Ivanhoe completed the office and warehouse building on December 31, 2020, as planned at a total cost of $4,680,000, and the weighted average amount of accumulated expenditures was $3,240,000. Compute the avoidable interest on this project. (Use interest rates rounded to 4 decimal places, e.g. 7.5825% for computational purposes and round final answers to I decimal places, e.g. 5,275.) Avoidable Interest Click if you would like to Show Work for this question: Open Show Work Attempts: 0 of 5 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

Loan name	Loan amount	Interest rate	Interest payment frequency
12% Construction Loan	1,800,000	12%	Semi Annually
10% Short term loan	1,260,000	10%	Monthly
11% Long term loan	900,000	11%	Annually
	3,960,000

Total cost	4,680,000
Weighted average of Accumulated expenditure	3,240,000

Avoidable Interest = weighted-average accumulated expenditures up to the principal balance of specific borrowing * interest rate on that specific borrowing + weighted-average accumulated expenditures in excess of specific borrowing * weighted-average interest rate.
						General Loan Interest rate calculation
Loan name	Loan amount	Interest rate	Interest payment frequency	Annual Interest	Effective Interest rate
10% Short term loan	1,260,000	10%	Monthly	131,938
11% Long term loan	900,000	11%	Annually	99,000
	2,160,000			230,938	10.6916%

For 10% Short term loan
Month	Principal	Interest @ 10%/12	Closing Balance
1	1,260,000	10,500	1,270,500
2	1,270,500	10,588	1,281,088
3	1,281,088	10,676	1,291,763
4	1,291,763	10,765	1,302,528
5	1,302,528	10,854	1,313,382
6	1,313,382	10,945	1,324,327
7	1,324,327	11,036	1,335,363
8	1,335,363	11,128	1,346,491
9	1,346,491	11,221	1,357,712
10	1,357,712	11,314	1,369,026
11	1,369,026	11,409	1,380,435
12	1,380,435	11,504	1,391,938
		131,938

Avoidable Interest
Type of loan	Amount	Interest rate	Interest
Specific Loan	1,800,000	12%	222,480
General Loan	1,440,000	10.6916%	153,959
Avoidable Interest			376,439