Problem #2 Unlimited Ltd. began the process of self-constructing an office build

Question

Problem #2 Unlimited Ltd. began the process of self-constructing an office building in 2017 In order to provide for partial financing of the total construction cost, the company issued a 15-month $400,000, 12% note, dated January 1, 2017, Also on Jan. 1, 2017 Unlimited paid Magnum Construction Corp. $500,000 as the first installment for the overall building contract which called for the following additional payments made on a a timely basis $ 900,000 $1,000,000 1-Jun-17 1-Oct-17 In addition to the construction note, Unlimited had the following other debt outstanding Due 15-Jun-34 30-Sep-21 Amount Outstandin $ 4,500,000 $ 500,000 Interest Rate 5% 10% Bonds Notes Instructions a Calculate the weighted average accumulated expenditures for 2017 b Calculate the weighted average interest rate for non-specific borrowings c Calculate the "avoidable interest" for 2017 d Calculate the actual interest for 2017 e Calculate the capitalized interest for 2017 Intermediate Accounting Take Home Exam Problem #2 8 Points Cancel Done

Explanation / Answer

Question a

The weighted expenditures incurred by the Company are as follows:

i. 1st installment to Construction Corp. = $500,000 X 12/12 = $500,000

ii. 2nd installment to Construction Corp. = 900,000 X 7/12 = 525,000

iii. 3rd installment to Construction Corp. = 1,000,000 X 3/12 = 300,000

Weighted average actual expenditure = $1,325,000

Question b

The 12% notes issued for the construction are considered specific borrowings as it is meant for the construction.

Hence the other Bonds and notes are non-specific.

The weighted average interest rate for these are:

(($4,500,000 X *8%) + ($500,000 X 10%))/$5,000,000 = 8.2%

Question c

In order to compute the avoidable interest rate we would use the following:

a. on $400,000 we apply 12% interest rate = 48,000

b. on ($1,325,000-400,000) we apply 8.2% = $75,850

Total Avoidable Interest = 48,000 + 75850 = $123,850

Question d

Actual Interest is

$40000 X 12% + $4,500,000 X 8% + $500,000 X 10% = $458,000

Question e

Capitalized interest is the lower of actual and avoidable interest. Hence the interest ot be Cpaitalised is

$123,850

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