Sage Company is constructing a building. Construction began on February 1 and wa

Question

Sage Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,992,000 on March 1, $1,272,000 on June 1, and $3,046,000 on December 31.

Sage Company borrowed $1,116,000 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, $2,383,000 note payable and an 10%, 4-year, $3,634,300 note payable. Compute avoidable interest for Sage Company. Use the weighted-average interest rate for interest capitalization purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal places, e.g. 5,275.)

$

$

Explanation / Answer

Answer)

According to the question,it is finance other than construction of buildings will be held for all the 12 months.

Here since, the loan with note of 13% is taken for purpose of building construction,it's interest must be expensed first.

Rate of interest on 9% and 10% note payable combined:

($2383000×9%+$3634300×10%)/($2383000+$3634300)

$9.60

Interest on expenditure for construction of business that can be capitalized:

[($1116000×13%)×10/12]+[(($1992000-$1116000)×9.6%)×10/12]+[1272000×9.6%×7/12]+[$3046000×9.6%×0/12]

=$262212-(1)

Total interest expense:

$1116000×13%×10/12+$2383000×9%+$3634300×10%

=$698800-(2)

Avoidable interest=

(2)-(1)

$698800-$262212

=$436588

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