Question

Sunland Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,780,000 on March 1, $2,520,000 on June 1, and $6,300,000 on December 31. Sunland Company borrowed $2,100,000 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 14%, 5-year, $4,200,000 note payable and an 11%, 4-year, $7,350,000 note payable. Compute avoidable interest for Sunland Company. Use the weighted-average interest rate for interest capitalization purposes.

Answer 1

$556,668

Step-by-step explanation:

According to the scenario, computation of the given data are as follow:-

General Interest Calculation:-

At the rate of 14% Note payable outstanding = $4,200,000 × 14%

=$588,000

At the rate of 11% Note payable = $7,350,000 × 11% = $808,500

General interest = ($588,000 + $808,500) ÷ ($4,200,000 + $7,350,000)

=$1,396,500 ÷ $11,550,000 = $0.1209 or 12.09%

Weighted Average Qualifying Loan

Date Payment ($) Used Funds Time÷Total Months Annualized Payment ($)

1 March 3,780,000 10 Months÷12 Months 3,150,000

1 June 2,520,000 7 Months÷12 Months 1,470,000

31 Dec. 6,300,000 0 Months 0

Total 4,620,000

Calculation of Avoidable Interest

Weighted average qualifying loan = $4,620,000

Interest on Reminder of Loan = (Weighted Average Qualifying Loan-Sunland Company Borrowed) × General Interest

= ($4,620,000 - $2,100,000) × 12.09%

= $304,668

Interest on specific loan= $2,100,000 × 12%

= $252,000

Avoidable interest for sunland company = $304,668 + $252,000

= $556,668