Question

Monty Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,340,000 on March 1, $1,560,000 on June 1, and $3,900,000 on December 31. Monty Company borrowed $1,300,000 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, $2,600,000 note payable and an 11%, 4-year, $4,550,000 note payable. Compute avoidable interest for Monty 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.)

Avoidable interest $

Answer 1

	Specific Borrowings on March 01	1,300,000.00
	Interest 5% for 10 Months	54,166.67
	Computation of Weighted Average Interest Rate
	Amount	Rate	Interest
	2,600,000.00	14%	364000
	4,550,000.00	11%	500500
	7,150,000.00		864500
	WAIR =	12%	(864500/7150000)
	Date of expense	Expense	Attributable to General Borrowings		Calculation
	1-Mar	2,340,000.00	2,340,000-1,300,000	1,040,000.00	(1,040,000*12%*10/12)	104000
	1-Jun	1,560,000.00	-	1,560,000.00	(1,560,000*12%*7/12)	109200
	31-Dec	3,900,000.00	-	3,900,000.00	(3,900,000*12%*0/12)	0
						213,200.00
	Hence Total Avoidable interest Cost = 213,200+54,166.67
		267,366.67
	Assumptions : a) Accounting period ends on 31st December. B) Assets takes substantial time in preparation for the purpose of capitalization of borrwoing Cost