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 $1,500,000 on March 1, $1,224,000 on June 1, and $3,023,000 on December 31.

Hanson Company borrowed $1,183,000 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 10%, 5-year, $2,344,000 note payable and an 11%, 4-year, $3,204,000 note payable. Compute avoidable interest for Hanson Company. (Round computation for interest rate to 2 decimal places, e.g. 2.25 and use the rounded amount for future calculations. Round final answer to 0 decimal places, e.g. 210,250.)

Explanation / Answer

1. WA for the project was 5.2 mil

2. Company borrowed 4.0 mil at 9% on May 31, which is less than the weighted avg expenditure. Avoidable interest then was 210,000

3. Company also had 1.0 mil outstanding all year at 12%,or 70,000 during the 7 month construction period. Maximum interest that could be capitalized is 280,000. Since the weighted avg for the project was more than the total borrowed during the period of construction, 280,000 is also the interest to be capitalized.

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