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 $1,848,000 on March 1, $1,200,000 on June 1, and $3,060,600 on December 31.

Hanson Company borrowed $1,097,600 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 10%, 5-year, $2,178,700 note payable and an 11%, 4-year, $3,821,400 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

Specific borrowing = $1,097,600. Annual interest rate = 13%. Annual interest cost = 13% of 1,097,000 = $142,688

Other borrowing = $2,178,700. Annual interest rate = 10%. Annual interest cost = 10% of 2,187,700 = $217,870

Other borrowing = $3,821,400. Annual interest rate = 11%. Annual interest cost = 11% of 3,821,400 = $420,354

Total borrowing = $1,097,600+$2,178,700+ $3,821,400 = 7,097,700

Total annual interest cost = $142,688+$217,870+$420,354 = 780,912

weighted average interest rate = total annual interest cost/total borrowing = 780,912/7,097,700 = 11.00%

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