Brief Exercise 10-4 Hanson Company is constructing a building. Construction bega

Question

Brief Exercise 10-4

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,028,000 on March 1, $1,272,000 on June 1, and $3,083,200 on December 31.

Hanson Company borrowed $1,032,800 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 9%, 5-year, $2,163,300 note payable and an 10%, 4-year, $3,598,500 note payable. Compute avoidable interest for Hanson Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.50% and final answer to 0 decimal places, e.g. 5,275.)

$___________

Explanation / Answer

Calculation of weighted average rate for interest capitalisation

Loan amount % Interest

1032800 13 134264   

2163300 9 194697

3598500 10 359850

Weighted average rate of interest=688811/6794600

=10.13%

Avoidable interest =($2163300*10.13%)+($3598500*10.13%)

=$219142.29+364528.05

=$583670.34

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