Question

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 expense?

Answer 1

Answer:-  

Weighted Average Expenditure :-  

Payments	FUnd Used	Annualised	Explanation
01- March - $6480000	10	5400000	6480000*10/12
01- June - $ 5310000	7	3097500	5310000*7/12
31 December - $ 8350000	0	0	8350000*0/12
Weighted Average Expendtiure		$8497500	5400000+3097500+0

  

Interest Actual and Average Interest Rate :-

Specific Loan For Construction :- $ 3200000 on Jan 1 @ 12% = 3200000*12% = $384,000

and for General Loan

Weighted Average rate =

$6390000 * 10% = 639000

$11950000 * 11% = 1314500

Total Interest = 639000+1314500= $1,953,500

Total General Loan = 6390000+11950000 = $18,340,000

Therefore Average Interest rate = 1953500 / 18340000 = 10.65% ( rounded of nearest 2 decimals)

Calculate avoidable interest

Weighted average of qualifying loan = $8,497,500

on specific loan of 3,200,000 @ 12% = $ 384,000

Interest on remainder of loan (8497500-3200000) = 5297500 @ 10.65% = $564,183.75

Avoidable interest = ($384,000+564183.75) = $948,183.75

Total interest incurred by company = $1,953,500

Capitalize the lowerof avoidable interest and total interest = $948,183.75

Rest will be charged to revenue account ( Profit and loss statement )

= 1953500-948183.75 = 10,053,16.25 Answer.