Question

On March 1, Mocl Co. began construction of a small building. The following expenditures were incurred for construction:

March 1		$315,000
April 1		254,000
May 1		751,500
June 1		1,152,000
July 1		391,000

The building was completed and occupied on July 1. To help pay for construction $215,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $2,000,000, 10% note issued two years ago.

Calculate the weighted-average accumulated expenditures. (Do not leave any answer field blank. Enter 0 for amounts.)

Date		Expenditures			Capitalization Period		Weighted-Average Accumulated Expenditure
March 1		$315,000			1/1204/122/123/12		$
April 1		254,000			04/122/121/123/12
May 1		751,500			4/123/121/122/120
June 1		1,152,000			04/123/121/122/12
July 1		391,000			3/121/124/122/120
							$

  

  

Calculate avoidable interest. (Round answer to 0 decimal places, e.g. 12,515.)

Avoidable interest

$

Answer 1

1. Calculation of weighted average accumulated expenditures-Summation of Expense×(No. Of months/12)

= (315,000×4/12)+(254,000×3/12)+(751,500×2/12)+(1,152,000×1/12)+(391,000×0/12)

= $389,750

March 1		$315,000
April 1		254,000
May 1		751,500
June 1		1,152,000
July 1		391,000

2. Avoidable Interest

= Specific Loan × Specific Rate of interest + (Weighted average accumulated expenditures - Specific Loan) × General Rate of interest

= (215,000 × 12% × 4/12) + [( 389,750 - (215,000 × 4/12)) × 10% × 4/12]

= $19,314

Working Notes -

1. The Financial year is assumed to be ending on 30 June every year as it is most common in US.

2. As the last expenditure was made on date of completion of the project, which is very unlikely in reality, the capitalisation of its interest of that expense is zero.

3. As the life of the project was less than a year, so further changes are made in calculation of Avoidable Interest.

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