TAKE-HOME PROBLEM SET #2: CHAPTERS 6 THROUGH 10 Page 19 of 20 2. In January 2018

Question

TAKE-HOME PROBLEM SET #2: CHAPTERS 6 THROUGH 10 Page 19 of 20 2. In January 2018, Sugar Hill Confections began construction of an office building to relocate its corporate headquarters. The company made the following expenditures during 2018 for construction costs: January 1 April 1 July 1 October 1 December 31 $1,500,000 4,800,000 2,000,000 1,750,000 Sugar office building and issued a note bearing 6.5% interest. bonds outstanding at January 1 that was the company's Hill Confections borrowed $5,000,000 on January 1, 2018 to finance the construction of the The company had $10,000,000 of 7.25% 2018. Your Answer What was the amount of the weighted-average accumulated expenditures on the project during 2018? (8 points) a. SUPPORTING CALCULATION reauired for full or partial-credit for your answer b. Compute the amount of the avoidable interest incurred on the project during 2018 Your Answer Avoidable interest incurred on the project (8 points) SUPPORTING CALCULATION muired for full or partial-credit for your answer

Explanation / Answer

a Weighted average accumulated expenditure January 1 $          1,500,000 x 12/12 $               1,500,000 April 1 $          4,800,000 x 9/12 $               3,600,000 July 1 $          3,200,000 x 6/12 $               1,600,000 October 1 $          2,000,000 x 3/12 $                   500,000 December 31 $          1,750,000 x 0/12 $                               -   Total $        13,250,000 $               7,200,000 b Since question has not specified whether we should use specific interest or weighted average I am using weighted average method 5000000 x 6.5% = 325000 10000000 x 7.25% = 725000 15000000 1050000 Weighterd average rate = 1050000/15000000 7.00% Avoidable interest = 7200000 x 7% = $504,000 c Amount of actual interest = 1050000 from part b d Total interest 1050000 amount capitalized 504000 Interest Expense 546000 e Total amount of construction in progress including capitalized interest is (13250000+504000) $        13,754,000

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