Question

Bridgeport Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,836,000 on March 1, $1,236,000 on June 1, and $3,038,370 on December 31. Bridgeport Company borrowed $1,112,250 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 9%, 5-year, $2,342,100 note payable and an 10%, 4-year, $3,467,800 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Answer 1

9.6%

Step-by-step explanation:

According to the problem, calculation are as follows,

Company borrowed on March 1 = $1,112,250

First we calculate total expenditures in constructing a building.

Total Expense = ($1,836,000 × 10÷12)+ ($1,236,000 × 7÷12)+ ($3,038,370 × 0÷12)

= $1,530,000 + $721,000 + 0

= $2,251,000

So, Difference in both amount = $2,251,000 - $1,112,250 = $1,138,750

We can calculate the weighted average interest rate by using following formula,

Weighted average interest rate = Interest ÷ outstanding principal

Where, Outstanding principal = $2,342,100 + $3,467,800 = $5,809,900

Interest = $2,342,100 × 9% + $3,467,800 × 10%

= $210,789 + $346,780 = $557,569

So, by putting the value in formula, we get,

Weighted average interest rate = $557,569 ÷ $5,809,900

= 0.096 or 9.6%