Question

Monty Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,908,000 on March 1, $1,308,000 on June 1, and $3,010,600 on December 31. Monty Company borrowed $1,015,500 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 10%, 5-year, $2,195,200 note payable and an 11%, 4-year, $3,604,500 note payable. Compute avoidable interest for Monty Company. Use the weighted-average interest rate for interest capitalization purposes.

Avoidable Interest?

Answer 1

The company can avoid $ 252,075.03 of interest expense

Step-by-step explanation:

construction capitalized interest:

We need to do an average of the capitalized cost for the building considering the time outstandings:

mar-01 1,908,000.00 x 10/12 = 1,590,000.00

jun-01 1,308,000.00 x 7/12 = 763,000.00

dic-01 3,010,600.00

2,353,000.00

Now we calculatethe specifit borrowing interest:

especific borrowings:

$ 1,015,500 x 0.11 = 110,012.50

non-specifit borrowings

2,353,000 -1,015,500 = 1,337,500.00

We solve for average rate:

average rate

principal rate interest

$2,195,200 0.1 $219520

$3,604,500 0.11 $396495

$5,799,700 $616015

total interest / total principal = average rate = 0.106214977

capitalized interest:

1,337,500 x 0.106214977 = 142,062.53

total interest capitalized

110,012.50 + 142,062.53 = 252,075.03