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 $1,956,000 on March 1, $1,296,000 on June 1, and $3,085,200 on December 31. Hanson Company borrowed $1,099,200 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, $2,491,500 note payable and an 10%, 4-year, $3,663,100 note payable. Compute the weighted-average interest rate used for interest capitalization purposes. (Round answer to 2 decimal places, e.g. 7.58%.)

Explanation / Answer

Calculation of Weighted Interest Rate Interest Rate Amount Interest 9% 5 yr Note payable    2,491,500.00            224,235.00 10% 4 yr Note payable    3,663,100.00            366,310.00    6,154,600.00            590,545.00 Weighted Interest rate = 790545 (Total Interest) / 6154600 (Total Principle)                                                = 9.60% (Approx)

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