Question

Bramble Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,600,000 on March 1, $2,400,000 on June 1, and $6,000,000 on December 31.

Bramble Company borrowed $2,000,000 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 8%, 5-year, $4,000,000 note payable and an 11%, 4-year, $7,000,000 note payable. Compute avoidable interest for Bramble Company. Use the weighted-average interest rate for interest capitalization purposes.

Answer 1

Date	Amount incurred	No. of months	Weighted average amount
	a	b	c=a × b/12
Mar. 1	3,600,000	10	3,000,000
Jun. 1	2,400,000	7	1,400,000
Dec. 31	6,000,000	-	-
Accumulated expenditure	4,400,000

Actual interest incurred:
Ref	Particulars		Principle	Rate of interest	Interest
A	Construction loan		2,000,000	12.0%	200,000
	General debt:
	8% debt		4,000,000	8%	320,000
	11% debt		7,000,000	11%	770,000
B	Interest on general debt		11,000,000		1,090,000
C=A+B	Total interest				1,290,000
	Average rate of interest on general debt=	= 1090000/ 11000000 × 100
			=	9.91%

Particulars		Amount used for contruction	Rate of interest	Interest
Contruction loan		1,500,000	12.0000%	200,000.00
General debt		2,900,000	9.9091%	287,363.64
Avoidable interest				487,363.64