Question

Riverbed Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,400,000 on March 1, $3,600,000 on June 1, and $9,000,000 on December 31.

Riverbed Company borrowed $3,000,000 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, $6,000,000 note payable and an 11%, 4-year, $10,500,000 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

Answer:

Avoidable Interest is as calculated below:
		Months outstanding	Average Investment
Mar-01	54,00,000	10	45,00,000
Jun-01	36,00,000	7	21,00,000
Dec-31	90,00,000	0	-
	1,80,00,000		66,00,000
Note Outstanding	Interest	Principal
60,00,000*10%	6,00,000	60,00,000
105,00,000*11%	11,55,000	1,05,00,000
	17,55,000	1,65,00,000
Weighted Average Interest rate	10.6364%
(17,55,000/165,00,000)
Total Interest Exp
30,00,000*12%*	3,60,000
(66,00,000-30,00,000)*10.6364%	3,82,910
Avoidable Interest	7,42,910