Question

Sandhill Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,700,000 on March 1, $1,800,000 on June 1, and $4,500,000 on December 31.

Sandhill Company borrowed $1,500,000 on March 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 5-year, $3,000,000 note payable and an 11%, 4-year, $5,250,000 note payable. Compute avoidable interest for Sandhill Company. Use the weighted-average interest rate for interest capitalization purposes.(Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.)

( the questions was already answer on cheg but was incorrect )

Answer 1

Weighted average of qualifying loan:-

Date	Payments	Funds Used	Annualized
March 1	$2,700,000	10 months	$2,250,000
June 1	$1,800,000	7 months	$1,050,000
Dec 31	$4,500,000	0 months	$0
Total			$3,300,000

Calculation of General Interest:-
12%, 5-year -year note payable = $3,000,000 * 12% = $360,000
11%, 4-year note payable = $5,250,000 * 11% = $577,500
General Interest = [ ($360,000 + $577,500) / ($3,000,000 + $5,250,000) ] *100
= (937,500 / 8250000) * 100 = 11.36%
Therefore, The General Interest is 11.36%

Calculation of avoidable interest:-
Weighted average of qualifying loan = $3,300,000
Interest on specific loan = $1,500,000 * 10% = $150,000
Interest on remainder of loan = ($3,300,000 - $1,500,000) * 11.36%= $204480
Avoidable interest for Sandhill Company= $150,000 + $204,480
Avoidable interest for Sandhill Company= $354,480