Hanson Company is constructing a building. Construction began on February 1 and

Question

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,932,000 on March 1, $1,296,000 on June 1, and $3,014,300 on December 31.

Hanson Company borrowed $1,066,600 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 9%, 5-year, $2,337,300 note payable and an 10%, 4-year, $3,742,300 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.)

Avoidable interest: $______ ?

Explanation / Answer

Answer:

Calculation of Weighted-average Accumulated Expenditure:

Weights (iii)

Weighted average Interest Rate = 247,780 / 2,711,530 = 9.14%

Calculation of Avoidable Interest:
Capitalized Interest = (Wtd-avg accumulated expenditures up to the principal balance of specific borrowing * interest rate on that specific borrowing) + (Wtd-avg accumulated expenditures in excess of specific borrowing * weighted- average interest rate)
= ($ 1,066,600 * 13%) + [($2,366,000 - $1,066,600) * 9.14%]
= $138,658 + $ 118,765
= $ 257,423
Therefore, Avoidable interest = $ 257,423 (answer).

Date Actual Expenditure (i) Capitalization period (ii)

Weights (iii)

Wtd. Avg. Accumulated Expenditure (i x iii) Mar 1 $ 1,932,000 10months 10/12 =0.83 $ 1,610,000 Jun 1 $ 1,296,000 7 months 7/12 =0.58 $ 756,000 Dec 31 $ 3,014,300 0 months 0/12 =0 $ 0 Total $ 2,366,000

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.