Question

Please show your work step by step!

Buffalo 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. Buffalo 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 Buffalo 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

STEP - 1 - Actual Interest
Type of Loan	Date	Amount of Loan	Rate of Interest	No of Months	Interest
Specific	01-03-XXXX	17,00,000	12%	10	1,70,000
General	01-01-XXXX	34,00,000	14%	12	4,76,000
General	01-01-XXXX	59,50,000	11%	12	6,54,500
TOTAL					13,00,500

STEP - 2 - Weighted Average Interest Rate for General Borrowing
Type of Loan	Date	Amount of Loan	Rate of Interest	No of Months	Interest
General	01-01-XXXX	34,00,000	14%	12	4,76,000
General	01-01-XXXX	59,50,000	11%	12	6,54,500
		93,50,000			11,30,500
Weighted Average Interest Rate					0.120909

STEP - 3 - Weighted Average Accumulated Expenditure
Date	Expenditure	No of Months	Weightage Average Expenditure
01-03-XXXX	30,60,000	10	25,50,000
01-06-XXXX	20,40,000	7	11,90,000
31-12-XXXX	51,00,000	0	-
	1,02,00,000		37,40,000

STEP - 4 - Calculation of Avoidable Interest
Type of Loan	Expenditure	Rate of Interest	Avoidable Interest
Specific	17,00,000	12%	2,04,000
General	20,40,000	12.0909%	2,46,655
	37,40,000		4,50,655

Balancing Figure

STEP - 5 - Capitalisation of Interest
Lower of Actual Interest and Avoidable Interest
Step - 1	13,00,500	Final Answer	4,50,655
Step - 4	4,50,655