Question

Sheridan Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6380000 on March 1, $5290000 on June 1, and $8650000 on December 31. Sheridan Company borrowed $3240000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6410000 note payable and an 11%, 4-year, $12850000 note payable. What is the avoidable interest for Sheridan Company?

Answer 1

Answer-

Weighted average of qualifying loan

Date	Payments $	Funds Used	Annualized $
March 1	6,380,000	10 months	5,316,667
June 1	5,290,000	7 months	3,085,833
Dec 31	8,650,000	0 months	0
Total			8,402,500

Calculation of General Interest
10%, 3-year note payable =6,410,000 * 10% =$641,000
11%, 4-year note payable =12,850,000 * 11% =$1,413,500
General Interest =[ (641,000 + 1,413,500) / (6,410,000 + 12,850,000) ] *100
=(2,054,500 / 19,260,000) * 100
=10.67%
Calculation of avoidable interest
Weighted average of qualifying loan =$8,402,500
Interest on specific loan =3,240,000 * 12% =$388,800
Interest on remainder of loan =(8,402,500 - 3,240,000) * 10.67% =$550,838.75
Avoidable interest for Metlock Company = 388,800 + 550,838.75
Avoidable interest for Metlock Company =$939,638.75