Question

In: Accounting

Red Man Construction is constructing a building. Construction began on January 1 and was completed on...

Red Man Construction 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. Red Man 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 amount of interest should be charged to expense?

Solutions

Expert Solution

Actual interest expenditure incurred:
Principal Interest % Interest
expenditure
1 2 1*2
12 % note-Specific loan for construction 3200000 12% 384000
10% note-General purpose 6400000 10% 640000
11% note-General purpose 12000000 11% 1320000
2344000
Avoidable interest=Weighted average accumulated expenditure*interest rate=3000000*9%=270000
Weighted average accumulated expenditure:
Date Expense Capitalization
period
Weight Weighted
expenditure
A B C=B/12 A*C
1-Mar 6400000 10 months 0.83 5333333
1-Jun 5280000 7 months 0.58 3080000
31-Dec 8000000 1 months 0.08 666667
9080000
Weighted average interest rate for general purpose notes:
Principal Interest % Interest
expenditure
10% note-General purpose 6400000 10% 640000
11% note-General purpose 12000000 11% 1320000
18400000 1960000
Weighted average interest rate=196000/18400000=10.65%
Avoidable interest:
Principal Interest % Interest
expenditure
Specific note 3200000 12% 384000
General note 5880000 10.65% 626220
(9080000-3200000)
1010220
Interest to be capitalized=Lower of actual interest or avoidable interest=Lower of 2344000 or 1010220=1010220
Hence interest to be charged to expense=Actual interest-Interest capitalized=2344000-1010220=1333780

Related Solutions

Red Man Construction is constructing a building. Construction began on January 1 and was completed on...
Red Man Construction 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. Red Man 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 prepare all entries that are necessary
(2) Red Man Construction is constructing a building. Construction began on January 1 and was completed...
(2) Red Man Construction 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. Red Man 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 amount of interest should be...
Marigold Corp. is constructing a building. Construction began on January 1 and was completed on December...
Marigold Corp. is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6380000 on March 1, $5250000 on June 1, and $8050000 on December 31. Marigold Corp. borrowed $3250000 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, $6450000 note payable and an 11%, 4-year, $12350000 note payable. What amount of interest should be charged to...
Bonita Industries is constructing a building. Construction began on January 1 and was completed on December...
Bonita Industries is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6552000 on March 1, $5280000 on June 1, and $8450000 on December 31. Bonita Industries borrowed $3180000 on January 1 on a 5-year, 10% note to help finance construction of the building. In addition, the company had outstanding all year a 8%, 3-year, $6410000 note payable and an 9%, 4-year, $12150000 note payable. What are the weighted-average accumulated expenditures? a.20282000 b.8540000...
Arlington Company is constructing a building. Construction began on January 1 and was completed on December...
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?
Sheridan Company is constructing a building. Construction began on January 1 and was completed on December...
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?
Villa Industries is constructing a building. Construction began on January 1 and was completed on December...
Villa Industries is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6370000 on March 1, $5300000 on June 1, and $8250000 on December 31. Bonita Industries borrowed $3250000 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, $6450000 note payable and an 11%, 4-year, $12250000 note payable. What is the actual interest for Bonita Industries?...
Swifty Corporation is constructing a building. Construction began on January 1 and was completed on December...
Swifty Corporation is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6480000 on March 1, $5310000 on June 1, and $8350000 on December 31. Swifty Corporation borrowed $3200000 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, $6390000 note payable and an 11%, 4-year, $11950000 note payable. What amount of interest should be charged to...
1.) Metlock Company is constructing a building. Construction began on February 1 and was completed on...
1.) Metlock Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,520,000 on March 1, $1,680,000 on June 1, and $4,200,000 on December 31. Metlock Company borrowed $1,400,000 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 12%, 5-year, $2,800,000 note payable and an 11%, 4-year, $4,900,000 note payable. Compute avoidable interest for Metlock Company. Use...
Novak Company is constructing a building. Construction began on February 1 and was completed on December...
Novak Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,944,000 on March 1, $1,224,000 on June 1, and $3,072,650 on December 31. Compute Novak’s weighted-average accumulated expenditures for interest capitalization purposes. Weighted-Average Accumulated Expenditures = $
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT