Question

Riverbed 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.

Riverbed Company borrowed $1,700,000 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 14%, 5-year, $3,400,000 note payable and an 11%, 4-year, $5,950,000 note payable. Compute avoidable interest for Riverbed Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 2.5125 and final answer to 0 decimal places, e.g. 5,275.)

Answer 1

Weighted-Average Accumulated Expenditure:
Date. Amount. Capitalization Pd. WAAE

March 1 = $3060000 x 10/12 = $2550000
June 1 = $2040000 x 7/12 = $1190000
Dec. 31 = $5100000 x 0 = $0
Total = $3740000


Weighted-Average Interest Rate:
14% 5-year note x $3400000 = $476000
11% 4-year note x $5950000 = $654500

Total Principal= $3400000 + $5950000 = $9350000
Total Interest = $476000 + $654500 = $1130500

WA-Interest Rate: $1130500/$9350000 = 12.09%

Avoidable Interest:
WAAE x Interest Rate = Avoidable Interest
$1700000 x 12% =$204000
$2040000 x 12.09% = $246636
total Avoidable Interest = $450636