Question

Pharoah Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,848,000 on March 1, $1,248,000 on June 1, and $3,019,800 on December 31.

Pharoah Company borrowed $1,112,400 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, $2,326,800 note payable and an 11%, 4-year, $3,400,300 note payable. Compute avoidable interest for Pharoah Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal places, e.g. 5,275.)

Avoidable interest 247439

hello i have posted the same qouestion since 2 hrs and it have been answered wrong, am so confused now. could please anyone give me an accurate answer?!!

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Answer 1

To compute the avoidable interest for Pharoah Company, determine the weighted average interest rate by multiplying the outstanding balances of each note payable by their respective interest rates and summing those amounts. Then, multiply the total expenditures made during the construction period by the weighted average interest rate to find the avoidable interest.

Step-by-step explanation:

To compute the avoidable interest for Pharoah Company, we need to determine the weighted average interest rate for interest capitalization purposes. The weighted average interest rate is calculated by multiplying the outstanding balance of each note payable by its respective interest rate and then summing those amounts.

For the 10%, 5-year, $2,326,800 note payable, the interest for the year is $232,680 (10% of $2,326,800). For the 11%, 4-year, $3,400,300 note payable, the interest for the year is $374,033 (11% of $3,400,300). Finally, for the 13%, 5-year, $1,112,400 note payable, the interest for the year is $144,712 (13% of $1,112,400).

Adding up the total interest for the year, we have $751,425 ($232,680 + $374,033 + $144,712). To calculate the weighted average interest rate, we divide this total interest by the sum of the outstanding balances of the notes payable, which is $7,039,500 ($2,326,800 + $3,400,300 + $1,112,400). The weighted average interest rate is approximately 10.6753% ($751,425 / $7,039,500).

Finally, to compute the avoidable interest, we multiply the total expenditures made during the construction period ($1,848,000 + $1,248,000 + $3,019,800) by the weighted average interest rate. The avoidable interest for Pharoah Company is approximately $616,876 ($5,115,800 * 0.106753).