On March 1, Gatt Co. began construction of a small building. The following expen

Question

On March 1, Gatt Co. began construction of a small building. The following expenditures were incurred for construction:

March 1 $ 75,000 April 1 $ 74,000

May 1 180,000 June 1 270,000

July 1 100,000

The building was completed and occupied on July 1. To help pay for construction $50,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $500,000, 10% note issued two years ago.

Instructions

(a) Calculate the weighted-average accumulated expenditures.

(b) Calculate avoidable interest.

Explanation / Answer

(a) Calculate the weighted-average accumulated expenditures. (Multiply the amount of the expenditure by the number of months left in the year)

3/1 $75,000 X 10/12 = $62,500

4/1 $74,000 X 9/12 = $55,500

5/1 $180,000 X 8/12 = $120,000

6/1 $270,000 X 7/12 = $157,500

7/1 $100,000 X 6/12 = $50,000

Weighted Average Accumulated Expenditures = $445,500 = $62,500 + $55,500 + $120,000 + $157,500 + $50,000

(b) Calculate avoidable interest = $45,550

$50,000 X 12% = $6000 (Debt specifically for construction X interest rate)

395,500 X 10% = $39,550 (The 395,500 is a plug X interest rate of debt not specifically for construction)

445,500 (Weighted Average Accumulated Expenditures)

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