Question

Ayayai Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,160,000 on March 1, $1,440,000 on June 1, and $3,600,000 on December 31.

Ayayai Company borrowed $1,200,000 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 8%, 5-year, $2,400,000 note payable and an 11%, 4-year, $4,200,000 note payable. Compute avoidable interest for Ayayai Company. Use the weighted-average interest rate for interest capitalization purposes. (Round "Weighted-average interest rate" to 4 decimal places, e.g. 0.2152 and final answer to 0 decimal places, e.g. 5,275.)

Avoidable interest

$

Answer 1

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	Avoidable Interest	$                 286,691
	Workings:
	Expenditure for the year
	Mar-01	$              21,60,000	X	10 / 12	=	$ 18,00,000
	Jun-01	$              14,40,000	X	7 / 12	=	$   8,40,000
	Dec-31	$              36,00,000	X	0 / 12	=	$                -
		$              72,00,000				$ 26,40,000
	Interest Capitalised
	$                                     26,40,000
Less:	$                                     12,00,000	X	12.00%		=	$   1,44,000
Balance	$                                     14,40,000	X	9.91%		=	$   1,42,691
	Interest Capitalised				=	$   2,86,691
	Weighted Average rate of all debt:-
		$              24,00,000	X	8%	=	$   1,92,000
		$              42,00,000	X	11%	=	$   4,62,000
		$              66,00,000				$   6,54,000
		Weighted Average rate of all debt =		9.9091%
		($ 654000 / $ 6600000)