In: Accounting
Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, $5,280,000 on June 1, and $8,000,000 on December 31. Arlington Company borrowed $3,200,000 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, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable. What is the avoidable interest for Arlington Company?
Solution:
Construction of Building - Arlington Company | |||
Schedule of Weighted-Average accumulated expenditure | |||
Date | Amount | Current year capitalization period | Weighted Average Accumulated Expenditures |
1-Mar | $6,400,000.00 | 10/12 | $5,333,333 |
1-Jun | $5,280,000.00 | 7/12 | $3,080,000 |
31-Dec | $8,000,000.00 | 0/12 | $0 |
$19,680,000.00 | $8,413,333 |
Weighted average interest rate on general borrowings = 10% * 64/184 + 11%*120/184 = 10.65%
Interest for specific borrowing should be capitalized for entire year.
Avoidable interest = ($3,200,000*12%) + ($8,413,333 - $3,200,000) * 10.65%
= $939,220