Question

Pronghorn Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $13,000,000 on January 1, 2020. Pronghorn expected to complete the building by December 31, 2020. Pronghorn has the following debt obligations outstanding during the construction period. 

Construction loan-12% interest, payable semiannually, issued December 31, 2019                                        $5,200,000

Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021                 3,640,000

Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024            2,600,000 

(a) Assume that Pronghorn completed the office and warehouse building on December 31, 2020, as planned at a total cost of $13,520,000, and the weighted-average amount of accumulated expenditures was $9,360,000. Compute the avoidable interest on this project. (Use interest rates rounded to 4 decimal places, e.g. 7.5825% for computational purposes and round final answers to O decimal places, e.g. 5,275.) 

Avoidable Interest $ _______ 

Answer 1

Weighted average interest rate of all other debt (Other than specific loan)
Debt	Amount	Interest rate	Interest amount
10% short tern loan	$36,40,000	10%	$3,64,000
11% long tern loan	$26,00,000	11%	$2,86,000
Totals	$62,40,000		$6,50,000
Weighted average rate (total interets/ total debt)		10.4167%

Computation of Avoidable interest
		Average	Interest Rate	Avoidable Interest
Avearge Accumulated Expenditure		$93,60,000
From:
Specific Loan interest		$52,00,000	12.0000%	$6,24,000
Other debt Interest		$41,60,000	10.4167%	$4,33,335
Total Avoidable Interest				$10,57,335