Question

Blossom Company is constructing a building. Construction began on February 1 and was completed on December 31 . Expenditures were $2,064,000 on March 1, $1,212,000 on June 1 , and $3,017,000 on December 31 . Blossom Company borrowed $1,158,000 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, $2,118,000 note payable and an 11%,4-year, $3,544,000 note payable. Compute avoidable interest for Blossom Company. Use the weighted-average interest rate for interest capitalization purposes. (Round weightedaverage interest rate to 4 decimal places, e.g.0.2152 and final answer to 0 decimal places, e.g.5, 275.) Avoidable interest

Answer 1

To compute avoidable interest for Blossom Company, we need to determine the weighted-average interest rate and the average accumulated expenditures. The weighted-average interest rate is calculated by multiplying the interest rate of each outstanding note payable by its respective balance and summing them up. The average accumulated expenditures are computed by dividing the sum of the expenditures by the number of periods between the start and completion of construction. Once we have these values, we can use the formula: avoidable interest = weighted-average interest rate × average accumulated expenditures.

Avoidable interest = 10.56% × $524,416.67 ≈ $55,291.20

Step-by-step explanation:

To compute the avoidable interest for Blossom Company, we need to determine the weighted-average interest rate and the average accumulated expenditures. The weighted-average interest rate is calculated by multiplying the interest rate of each outstanding note payable by its respective balance and summing them up. In this case, we have a 10% note payable and an 11% note payable. The average accumulated expenditures are computed by dividing the sum of the expenditures by the number of periods between the start and completion of construction. Once we have these values, we can use the formula: avoidable interest = weighted-average interest rate × average accumulated expenditures.

Using the data provided: Total balance of 10% note payable = $2,118,000, Total balance of 11% note payable = $3,544,000, Total expenditures = $2,064,000 + $1,212,000 + $3,017,000 = $6,293,000, Number of periods = 12 months

Weighted-average interest rate = (10% × $2,118,000 + 11% × $3,544,000) / ($2,118,000 + $3,544,000) = 10.56%, Average accumulated expenditures = $6,293,000 / 12 months = $524,416.67

Avoidable interest = 10.56% × $524,416.67 ≈ $55,291.20

Answer 2

The average accumulated expenditures are obtained by adding up the expenditures at different points in time and dividing by the number of points. The avoidable interest is then computed by multiplying the weighted-average interest rate by the average accumulated expenditures which is $302,389.01.

Step-by-step explanation:

To compute the avoidable interest for Blossom Company, we need to calculate the weighted-average interest rate and then apply it to the average accumulated expenditures. Here's how to calculate it:

1. Calculate the weighted-average interest rate. To do this, multiply the principal amounts of each loan by their respective interest rates, and then divide the total interest by the total principal. In this case, the principal and interest amounts are:

• $1,158,000 principal with 12% interest
• $2,118,000 principal with 10% interest
• $3,544,000 principal with 11% interest

Calculate the total principal: $6,820,000Calculate the total interest: ($1,158,000 * 0.12) + ($2,118,000 * 0.10) + ($3,544,000 * 0.11) = $381,600 + $211,800 + $389,840 = $983,240Calculate the weighted-average interest rate: $983,240 / $6,820,000 = 0.144 (rounded to 3 decimal places)Next, calculate the average accumulated expenditures. Add up the expenditures at the different points in time and divide by the number of points. In this case, the expenditures are:

• $2,064,000 on March 1
• $1,212,000 on June 1
• $3,017,000 on December 31

Calculate the average accumulated expenditures: ($2,064,000 + $1,212,000 + $3,017,000) / 3 = $2,097,667 (rounded to the nearest integer)Finally, compute the avoidable interest by multiplying the weighted-average interest rate by the average accumulated expenditures: 0.144 * $2,097,667 = $302,389.01 (rounded to 2 decimal places)

Therefore, the computed avoidable interest for Blossom Company is approximately $302,389.01.