Hanson Company is constructing a building. Construction began on February 1 and
ID: 2447571 • Letter: H
Question
Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,016,000 on March 1, $1,260,000 on June 1, and $3,048,200 on December 31. Hanson Company borrowed $1,194,100 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 10%, 5-year, $2,234,000 note payable and an 11%, 4-year, $3,719,000 note payable. Compute avoidable interest for Hanson Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.50% and final answer to 0 decimal places, e.g. 5,275.)
Explanation / Answer
CALCULATION OF AVOIDABLE INTEREST
PERIOD OF CONSTRUCTION=11 MONTHS
EXPENDITURES:
MARCH 1=$20,16,000*10/12
JUNE 1=$12,60,000*7/12
DEC 31=$30,48,200*1/12
TOTAL ACCUMULATED EXPENDITURE=$26,69,017
BORROWINGS:
@12%=$11,94,100(10 MONTHS)
@10%=$22,34,000(12 MONTHS)
@11%=$37,19,000(12 MONTHS)
EQUIVALENT LOAN OUTSTANDING=11,94,100*10/12+22,34,000*12/12+37,19,000*12/12
=$9,95,083+22,34,000+37,19,000
=$69,48,083
WEIGHTED AVERAGE INTEREST RATE=12%*9,95,083/69,48,083+10%*22,34,000/69,48,083+11%*37,19,000/69,48,083
=1.72+3.22+5.89
=10.83%
AVOIDABLE INTEREST FOR HANSON COMAPNY=ACCUMULATED EXPENDITURE*WEIGHTED AVERAGE INTEREST RATE=$26,69,017*10.83%=$2,89,055
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