Brief Exercise 10-4 Larkspur Company is constructing a building. Construction be

Question

Brief Exercise 10-4 Larkspur Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,026,100 on December 31 Larkspur Company bom wed $1,159,000 on March 1 on a 5 year, 13% note to help finance construct on of the bulding. In additon, the company had ou 29%, 5-year, $2,017,300 note payable and an 10%, 4-year, $3,5 9,800 note payable. Compute avoidable nterest for Larkspur Company Use the weighted average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final dnswer to 0 decimal plac es, e.g. 5,275.) Avoidable interest Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor Question Attempts: 0 of 3 used SAVE FOR LATER SUBMIT ANSWER Earn Maximum Points available only if you answer this question correctly in your first attempt

Explanation / Answer

Calculation of Weighted Average Interest Rate for interest capitalization (Amts in $)

Weighted Average Interest Rate = Total Interest/Total Loan Amount

= $667,095.33/$6,776,100 = 9.84%

Calculation of Weighted Average Expenditure (Amounts in $)

Avoidable Interest = Weighted Average Expenditure on Building*Weighted Average Interest Rate

= $2,200,000*9.84% = $216,480

Therefore the avoidable interest is $216,480.

Loan Loan Amount Months for which loan due Interest Rate Interest Exp. for loan 5 year Note 1,159,000 (March 1 to Dec 31) 10 months 13% ($1,159,000*13%*10/12) = $125,558.33 5 year Note Payable 2,017,300 12 months 9% ($2,017,300*9%) = $181,557 4 year Note Payable 3,599,800 12 months 10% ($3,599,800*10%) = $359,980 Total 6,776,100 667,095.33

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