Homework Answers
Answer -
| Date | Expenditures | Capitalization period | Annualized |
| March 01 | $3600000 | 10 months | $3000000 |
| June 01 | $2400000 | 7 months | $1400000 |
| Dec. 31 | $6000000 | 0 | $0 |
| Total | $12000000 | $4400000 |
Calculation:
March 01 = [$3600000 * (10 / 12)] = $3000000
June 01 = [$2400000 * (7 / 12)] = $1400000
Dec. 31 = [$6000000 * (0 / 12)] = $0
Total expenditures qualifying for interest capitalization or Weighted average of qualifying loan = $4400000
And
| Borrowed fund | Interest rate | Interest | |
| Specified loan | $2000000 | 12% | $240000 |
| Other loan: | $4000000 | 8% | $320000 |
| $7000000 | 11% | $770000 | |
| Total other loan | $11000000 | $1090000 |
Weighted average interest rate for other loans = ($1090000 / $11000000) * 100
Weighted average interest rate for other loans = 9.9091 %
And
Total interest incurred by company = $240000 + $320000 + $770000 = $1330000
Now,
Computation of avoidable interest:
Weighted average of qualifying loan = $4400000
Reminder of loan = Weighted average of qualifying loan - Specific loan
Reminder of loan = $4400000 - $2000000 = $2400000
| Loan amount | Interest rate | Interest | |
| Specific loan | $2000000 | 12% | $240000 |
| Reminder of loan | $2400000 | 9.9091% | $237818.4 |
| Avoidable interest | $477818.4 |
Avoidable interest = $477818
Capitalize the lower of avoidable interest ($477818) and total interest incurred by company ($1330000) = $477818
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