Question

On January 1, 2020, Lawrence Co. began construction of a building to be used as its office headquarters. The building is expected to be completed on December 31, 2020. Expenditures on this project during 2020 were as follows:
                January 1st          $ 160,000
March 1st               420,000
June 1st                  270,000
October 31st           165,000
On Jan. 1, 2020, the company obtained a $600,000 specific construction loan with a 7% interest rate. The loan was outstanding during the entire construction period. The company’s other interest-bearing debts included two long-term notes of $480,000 and $900,000 with interest rates of 10% and 11%, respectively. Both notes were outstanding during the entire construction period.

Instruction:
(a) Determine the amount of interest capitalized for 2020. Please show your work (i.e. the weighted average accumulated expenditure, the actual interest, the weighted average interest rate, and the avoidable interest) to support your final answer. Please round the WA interest rate to four decimal places when necessary.      

    Answer: The amount of interest capitalized for 2020 is                                                            .
(b) Regardless your answer in (a), determine the amount of avoidable interest for 2020 assuming that the weighted average accumulated expenditure is $534,000 (other things being equal).

Answer 1

Requirement:A

Interest capitalized for 2020 [Lower of Actual or Avoidable Interest]

$                           52,120

Working:

Calculation of weighted average accumulated expenditure
Date	Amount	Capitalization Period( Months)	Expenditure
Jan. 1	$                              160,000.00	12	$                                                160,000.00
March. 1	$                              420,000.00	10	$                                                350,000.00
June. 1	$                              270,000.00	7	$                                                157,500.00
Oct. 31	$                              165,000.00	2	$                                                  27,500.00
	$                          1,015,000.00		$                                                695,000.00
Calculation of general interest rate
Debt	Amount	Interest rate	Interest Amount
10% Note Payable	$                              480,000.00	10.00%	$                                                  48,000.00
11% Note Payable	$                              900,000.00	11.00%	$                                                  99,000.00
Total	$                          1,380,000.00	10.6522%	$                                                147,000.00
Calculation of Avoidable Interest
Debt	Amount	Interest rate	Interest Amount
Specfic Debt	$                              600,000.00	7.00%	$                                                        42,000
Remaining Loan	$                                95,000.00	10.6522%	$                                                        10,120
Total	$                              695,000.00		$                                                        52,120
Calculation of Actual Interest
Debt	Amount	Interest rate	Interest Amount
Construction Note 12%	$                              600,000.00	7.00%	$                                                        42,000
10% Note Payable	$                              480,000.00	10.00%	$                                                        48,000
11% Note Payable	$                              900,000.00	11.00%	$                                                        99,000
Total	$                          1,980,000.00		$                                                      189,000

Requirement:B

Avoidable Interest

$                           37,380

Working:

Calculation of Avoidable Interest
Debt	Amount	Interest rate	Interest Amount
Specfic Debt	$                              534,000.00	7.00%	$                                                        37,380
Remaining Loan	$                                               -	0.0000%	$                                                                 -
Total	$                              534,000.00		$                                                        37,380