Question

Larkspur Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,016,000 on March 1, $1,296,000 on June 1, and $3,052,400 on December 31.

Larkspur Company borrowed $1,137,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,453,000 note payable and an 11%, 4-year, $3,176,300 note payable. Compute avoidable interest for Larkspur Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal places, e.g. 5,275.)

Avoidable interest

$enter the avoidable interest in dollars rounded to 0 decimal places

Answer 1

Calculation of weighted average expense

= ($2016000*10/12) + ($1296000*7/12) + ($3052400*0/12)

= $2436000

Calculation of interest rates.

For specific loan = upto $1137000 @ 12%

For other loans

= (($2453000*10%) + ($3176300*11%)) / ($2453000+$3176000)

= $594693/$5629000 *100

= 10.56%

Calculation of avoidable interest

1. Specific loan upto $1137000@12% = $136440

2. Other loan ($2436000-$1137000)*10.56% = $137174.40

Total avoidable = $136440 + $137174.40 = $273614.40

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