Question

Brief Exercise 10-3

Nash Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,088,000 on March 1, $1,236,000 on June 1, and $3,090,260 on December 31.

Nash Company borrowed $1,083,960 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 9%, 5-year, $2,493,000 note payable and an 10%, 4-year, $3,319,800 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

weighted average interest rate?

Answer 1

The weighted-average interest rate used for interest capitalization purpose should not include the specific purpose borrowings, but include all general borrowings. So the "Company borrowed $1,083,960 on March 1 on a 5-year, 12% note to help finance construction of the building" shall not include the weighted-average interest rate used for interest capitalization purpose.

It is pressumed that the books are closed on 31^st December.

The weighted-average interest rate? = Total interest excluding Specific purpose borrowal / total outstanding excluding Specific purpose borrowal.

Total interest on general purpose borrowing = Outstanding amount in each borrowal X specified interest rate X period, here period is 11 months from 1^st feb to dec31^st?,

=($2,493,000 X 9% X 11/12) + ( $3,319,800 X 10% X 11/12),

= $186,975 + $304,315,

= $491,290

Total Outsatanding Amount = ($2,493,000? + $3,319,800?) X 11/12

= $5812800 X 11/12,

= $53,28,400,

So Weighted Average Interest rate = $491,290? / $53,28,400,

0.0922021619998499 or 9.22021619998499 %.

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