Question

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, $5,280,000 on June 1, and $8,000,000 on December 31. Arlington Company borrowed $3,200,000 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, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable. What is the avoidable interest for Arlington Company?

Answer 1

Avoidable interest for Arlington Company is $939,220

Step-by-step explanation:

Arlington Company

Schedule of Weighted-Average accumulated expenditure

Date Amount Current year Weighted Average

capitalization Accumulated

period Expenditures

1-Mar $6,400,000 10/12 $5,333,333

1-Jun $5,280,000 7/12 $3,080,000

31-Dec $8,000,000 0/12 $0

Total $19,680,000. $8,413,333

Note: Weighted-Average accumulated expenditure = Amount * Current year capitalization period

Weighted average interest rate on general borrowings = 10% * (6,400,000 / 18,400,000) + 11%* (12,000,000 / 18,400,000)

=10.65%

Interest for specific borrowing should be capitalized for entire year.

Avoidable interest = ($3,200,000*12%) + ($8,413,333 - $3,200,000) * 10.65%

Avoidable interest = $939,220