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Marigold Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,440,000 on March 1, $960,000 on June 1, and $2,400,000 on December 31. Marigold Company borrowed $800,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $1,600,000 note payable and an 11%, 4-year, $2,800,000 note payable. Compute avoidable interest for Marigold Company. Use the weighted-average interest rate for interest capitalization purposes.

Respuesta :

anthougo

Answer:

Marigold Company

The avoidable interest is $189,056.

Explanation:

a) Data and Calculations:

Date           Expenditures         Weights    Weighted-Average

March 1       $1,440,000            10/12           $1,200,000

June 1             960,000              7/12               560,000

Dec. 31        2,400,000              0/12                0

Accumulated weighted-average expenditure = $1,760,000

Weighted-average interest rate:

Interest on $1,600,000 * 12% = $192,000

Interest on $2,800,000 * 11% =   308,000

Total         $4,400,000              $500,000

Weighted-average rate = $500,000/$4,400,000 * 100 = 11.36%

Interest capitalized

Specific borrowing = $800,000 * 10% = $80,000

Excess of accumulated weighted-average expenditure:

= $960,000 ($1,760,000 - $800,000) * 11.36% = $109,056

Total interest capitalized  = $189,056

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