Question

Sunland Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $900,000 on March 1, $600,000 on June 1, and $1,500,000 on December 31.

Sunland Company borrowed $500,000 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 12%, 5-year, $1,000,000 note payable and an 11%, 4-year, $1,750,000 note payable. Compute avoidable interest for Sunland Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.

Answer 1

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	Avoidable Interest	$                 1,28,182
	Workings:
	Expenditure for the year
	Mar-01	$                 9,00,000	X	10 / 12	=	$   7,50,000
	Jun-01	$                 6,00,000	X	7 / 12	=	$   3,50,000
	Dec-31	$              15,00,000	X	0 / 12	=	$                -
		$              30,00,000				$ 11,00,000
	Interest Capitalized
	$                         11,00,000
Less:	$                            5,00,000	X	12.00%		=	$       60,000
Balance	$                            6,00,000	X	11.3636%		=	$       68,182
	Interest Capitalized				=	$   1,28,182
	Weighted Average rate of all debt:-
		$              10,00,000	X	12%	=	$   1,20,000
		$              17,50,000	X	11%	=	$   1,92,500
		$              27,50,000				$   3,12,500
		Weighted Average rate of all debt =				11.3636%
		($312500 / $2750000)