Question

Riverbed Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $5,040,000 on March 1, $3,360,000 on June 1, and $8,400,000 on December 31.

Riverbed Company borrowed $2,800,000 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, $5,600,000 note payable and an 11%, 4-year, $9,800,000 note payable. Compute avoidable interest for Riverbed 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.)

Avoidable interest

Answer 1

Computation of weighted average accumulated expenditure:

Payment Date	Expenditure (A)	Capitalization period (B)	Weight (C=B/12)	Weighted Expenditure(A*C)
March 01	$5040000	10 month	0.83	$4183200
June 01	$3360000	7 month	0.58	$1948800
December 31	$8400000	0 month	0	0
				$6132000

Computation of weighted average interest Rate:

Loan	Principal	Interest Rate	Annual interest
5 year Note Payable	$5600000	8 %	$448000
4 year Note Payable	$9800000	11%	$1078000
	$15400000		$1526000

Weighted Average interest Rate = Total interest / Total Principal = $1526000/$15400000 = 9.9091%

Calculation of avoidable interest:

Specific 12% Note Payable = $2800000*12%*10/12 = $280000

Rest Interest on Note Payable = (6132000 – $2800000)*9.9091% = $3332000*9.9091% = $330171.21

Avoidable interest = $280000 + $330171.21 = $610171.21 i.e. $610171.