Question

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31.
Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on December 31.
1) Compute Hanson's weighted-average accumulated expenditures for interest capitalization purposes.
Hanson Company borrowed $1,000,000 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 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable.
2) Compute the weighted-average interest rate used for interest capitalization purposes.
3) Compute avoidable interest for Hanson Company that will be capitalized

Answer 1

1)The calculation of weighted average accumulated expenditure is shown below:

Therefore, the correct answer is $2,200,000

2)The calculation of Weighted Average interest rate is shown below:

Weighted average interest rate = $585,000/$5,500,000 = 0.10636 or 10.64%

$2,200,000 - $1,000,000 = $1,200,000