Question

Brief Exercise 10-3

Splish Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,064,000 on March 1, $1,212,000 on June 1, and $3,041,210 on December 31.

Splish Company borrowed $1,153,590 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,441,700 note payable and an 11%, 4-year, $3,254,300 note payable. Compute the weighted-average interest rate used for interest capitalization purposes. (Round answer to 2 decimal places, e.g. 7.58%.)

Weighted-average interest rate

%

Answer 1

Computation of Weighted average interest rate for interest capitalization purposes.

10% , 5 year , $ 2441700 note payable

Principal Amount = $ 2441700

Interest Amount = $ 2441700 x 10% = $ 244170

11% , 4 year , $ 3254300 note payable

Principal Amount = $ 3254300

Interest Amount = $ 3254300 x 11% = $ 357973

Total Principal Amount = $ 2441700 + $ 3254300 = $ 5696000

Total Interest Amount = $ 244170 + $ 357973 = $ 602143

Weighted Average Interest rate = $ 5696000 / $ 602143 = 10.57%

Schedule of Weighted-Average accumulated expenditure
Date	Amount	Current year capitalization period	Weighted Average Accumulated Expenditures
1-Mar	$ 2064000	10/12	$ 1720000
1-Jun	$ 1212000	7/12	$ 707000
31-Dec	$ 3041210	0/12	$ 0
	$ 6317210		$ 2427000

Interest for specific borrowing should be capitalized for entire year.Here Specific borrowing is to help finance construction of the building done on March 1 an amount of $ 1153590.It will be charges @ 13% interest rate

Other borrowings chargeble at Weighted average interest rate of 10.57%

Therefore Avoidable interest = $ 1153590 x 13% +( $ 2427000 - $ 1153590 ) x 10.57% = $ 149966.7 + $ 134599.44 = $ 284566