Question

Blossom Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $3,240,000 on March 1, $2,160,000 on June 1, and $5,400,000 on December 31. Blossom Company borrowed $1,800,000 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, $3,600,000 note payable and an 11%, 4-year, $6,300,000 note payable. Compute avoidable interest for Blossom Company. Use the weighted-average interest rate for interest capitalization purposes. Calculate  Avoidable interest?

Answer 1

Step 1:
Table to compute weighted average accumalated Expenditure
Date	Expenditures	Period Remaining (in months)	Weighted Average Accumalated Expenditure
1-Mar	$    3,240,000.00	10	$                2,700,000.00
1-Jun	$    2,160,000.00	7	$                1,260,000.00
31-Dec	$    5,400,000.00	0	$                                     -
	Total		$                3,960,000.00
Step 2 :
Weighted average interest rate (WAIR) :
	WAIR=	Total Interest	$                1,125,000.00	=	11.36%
		Total Principal	$                9,900,000.00
Table to compute Total Interest
S. no.	Principal	Rate of Interest	Interest
1	$    3,600,000.00	12%	$                   432,000.00
2	$    6,300,000.00	11%	$                   693,000.00
Total	$    9,900,000.00		$                1,125,000.00
Step 3:
Outstanding Principal = Weighted Expenditure − New notes payable
	=	$ 3,960,000 - $ 1,800,000
	=	$        2,160,000.00
Step 4 :
	Table to Compute Avoidable Interest
	Particular	Amount	Rate of Interest	Interest
	Specified Notes	$        1,800,000.00	12.00%	$ 216,000.00
	General Notes	$        2,160,000.00	11.36%	$ 245,455.00
	Total	$        3,960,000.00		$ 461,455.00