Question

Vaughn Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,260,000 on March 1, $840,000 on June 1, and $2,100,000 on December 31.

Vaughn Company borrowed $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 8%, 5-year, $1,400,000 note payable and an 11%, 4-year, $2,450,000 note payable. Compute avoidable interest for Vaughn 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

$enter the avoidable interest in dollars rounded to 0 decimal places

Answer 1

Calculation of Weighted Average Accumulated Expenditure Months outstanding from the date of payment to Capitalization period C B/12 Weighted Average Accumulated Expenditures Date of Construction Amount Paid D (Ax C) expenses made Dec 1,260,000 10 months 840,000 7 months 2,100,000 0 month 10/12 (1,260,000 x 10/12) (840,000 x 7/12) (2,100,000 x 0 /12) March 01 1,050,000 490,000 7/12 June 01 X December 31 0/12 Total 4,200,000 1,540,000 Calculation of Weighted Average rate of other debts Interest Amount Amount of Loan Rate of Interest [A] [B] [Ax B 8% 5 year note 8% 112,000 1,400,000 11% 4 year note 11% 2,450,000 269,500 Total 3,850,000 381,500 (381,500/ 3,850,000) Weighted Averagae rate of All debts 9.9091% |Caculation of Avoidable Interest Weighted Average of Qualifying loan 1,540,000 Avoidable Interest Interest% Loan cost [A] [Ax B] [B] Interest on specific loan of Construction 12.0000% 700,000 84,000 Interest on remainder of Loan (1,540,000 700,000) 9.9091% 840,000 83,236 Total Avoidable Interest cost 167,236 Avoidable Interest 167,236