Question

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $2,400,000 on March 1, $1,980,000 on June 1, and $3,000,000 on December 31. Arlington Company borrowed $1,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $2,400,000 note payable and an 11%, 4-year, $4,500,000 note payable. What is the weighted-average interest rate used for interest capitalization purposes

Answer 1

10.65%

Step-by-step explanation:

The computation of weighted-average interest rate is shown below:-

3- year note payable $240,000

($2,400,000 × 10%)

4 - year note payable $495,000

($4,500,000 × 11%)

Total interest $735,000

Weighted interest rate = Total interest ÷ (3 year note payable + 4 year note payable) × 100

= $735,000 ÷ ($2,400,000 + $4,500,000) × 100

= $735,000 ÷ $6,900,000 × 100

= 10.65%

Therefore for computing the weighted-average interest rate we simply applied the above formula.