Hanson Company is constructing a building. Construction began on February 1 and

Question

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,016,000 on March 1, $1,236,000 on June 1, and $3,084,900 on December 31. Hanson Company borrowed $1,118,300 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 9%, 5-year, $2,044,700 note payable and an 10%, 4-year, $3,521,500 note payable. Compute avoidable interest for Hanson Company. Use the weighted-average interest rate for interest capitalization purposes.

Explanation / Answer

Principal

Interest

9%, 5-year note

$2,044,700

$200,000

10%, 4-year note

$3,521,500

384,000

$5,566,200

$584,000

Weighted-average interest rate

= $584,000/5,566,200=10.50%

Principal

Interest

9%, 5-year note

$2,044,700

$200,000

10%, 4-year note

$3,521,500

384,000

$5,566,200

$584,000

Weighted-average interest rate

= $584,000/5,566,200=10.50%

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