Question

Question text

Company began construction of a machine on 1/1/2021. Company borrowed $700,000 at 10% on 1/1/2021 for this project. The project was under construction during the entire calendar year. Expenditures were made on the project during the year:

Expenditure	|| Date
100,000	1/1/2021
300,000	3/1/2021
600,000	7/1/2021
400,000	10/1/2021

Company also had $1,000,000 outstanding at 12% during the entire year.

Required:

Calculate Avoidable and Actual Interest. Show work to receive credit.

Answer 1

Weighted average accumulated expenditure:-
Date	Expenditure $	Period	Weighed Average accumulated expenditure $
01-01-2021	100,000	12/12	100,000
01-03-2021	300,000	10/12	250,000
01-07-2021	600,000	6/12	300,000
01-10-2021	400,000	3/12	100,000
Total	1,400,000		750,000
Interest to be capitalize:-	Avoidable Interest
Weighed Average accumulated expenditure	Appropriate Interest rate	Avoidable Interest
700,000	10%	70,000
50,000	12%	6,000
	Total	76,000
Avoidable Interest	$ 76,000
Actual Interest	$ 190,000	( 700,000 x 10% ) + ( 1,000,000 x 12% )