2. On January 1, Model Inc. began construction of a small building. The followin
ID: 2591649 • Letter: 2
Question
2. On January 1, Model Inc. began construction of a small building. The following expenditures were incurred for construction:
January 1 $2,000,000
April 1 2,800,000
October 1 2,000,000
December 31 3,130,000
The building was completed and occupied on December 31. To help pay for construction $3,250,000 was borrowed on January 1 on a 10%, three-year note payable. The company also has debt outstanding during the year of $10,000,000 bond at 8% issued one year ago.
Instructions
(a) Calculate the weighted-average accumulated expenditures.
(b) Calculate avoidable interest (capitalizable interest)
Explanation / Answer
a Weighted Average Accumulated Expenditure Date Actual Expenditure Capitalisation Period Weighted Average Accumulated Expenditure January 1 2,000,000 12/12 2,000,000 April 1 2,800,000 9/12 2,100,000 October 1 2,000,000 3/12 500,000 December 1 3,130,000 0 - Weighted Average Accumulated Expenditure 4,600,000 b Computation of Avoidable interest Weighted Average Accumulated Expenditure Debts Interest Rate Avoidable Interest Specific Debts 3,250,000 10% 325,000 General 1,350,000 8% 108,000 4,600,000 433,000
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