Question

confused, thanks for any help

7. Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, S5,280,000 on June 1, and $8,000,000 on December 31. Arlington Company borrowed $3,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable. What is the avoidable interest for Arlington Company (choose the closest number)? A) $384,000 B) $1,236,820 C) $438,682 D) $939,220

Answer 1

solution:

Weighted-Average accumulated expenditure
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
1-Mar	$6,400,000	10/12	$5,333,333
1-Jun	$5,280,000	7/12	$3,080,000
31-Dec	$8,000,000	0/12	$0
Total	$19,680,000		$8,413,333

Weighted average interest rate of all other debt
Debt	Amount	Interest rate	Interest amount
10% Note	$6,400,000	10%	$640,000
11% Note	$12,000,000	11%	$1,320,000
Totals	$18,400,000		$1,960,000
Weighted average rate (total interest/ total debt)		10.65%

Interest Capitalized
Debt		Amount
3200000*12% =		$384,000
(8413333- 3200000)*10.65% =		$555,220
Total interest capitalized		$939,220

Hence option D is correct.