Question

Bramble Corp. is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6300000 on March 1, $5270000 on June 1, and $8950000 on December 31. Bramble Corp. borrowed $3180000 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, $6380000 note payable and an 11%, 4-year, $12550000 note payable. What amount of interest should be charged to expense? $7850132 $1088532 $2010500 $1470132

Answer 1

$1,470,132

Step-by-step explanation:

Expenditures:

March 1, $6,300,000

June 1, $5,270,000

December 31, $8,950,000

the weighted average interest rate:

$6,380,000 x 10% = $638,000

$12,550,000 x 11% = $1,380,500

total debt = $18,930,000

total interest = $2,018,500

weighted average interest rate = $2,018,500 / $18,930,000 = 10.663%

weighted average accumulated expenditures:

March 1, $6,300,000 x 10/12 = $5,250,000

June 1, $5,270,000 x 7/12 = $3,074,167

December 31, $8,950,000 x 0/12 = $0

total = $8,324,167

interests on the specific loan = $3,180,000 x 12% = $381,600

interests on remaining expenditures = ($8,324,167 - $3,180,000) x 10.663% = $548,520

total interest capitalized = $930,120

total interest expensed = total interests on other loans - interests capitalized on remaining expenditures = $2,018,500 - $548,520 = $1,469,980 ≈ $1,470,132 which we can match to the nearest option due since during the procedure we rounded a couple of times.