Brief Exercise 10-4 Hanson Company is constructing a building. Construction bega

Question

Brief Exercise 10-4

Hanson 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 $3,000,000 on December 31.

Hanson Company borrowed $1,000,000 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 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute avoidable interest for Hanson 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.)

Avoidable interest $

Explanation / Answer

Weighted average expenditure

1500000

(1800000*10/12)

700000

(1200000*7/12)

Weighted average expenditure = 2200000

Weighted average rate for other loans

Weighted average rate for other loans =585000/5500000 = 10.64%

Avoidable interest

Interest on specific loan = 1000000*12% =120000

+ Interest on remainder of loan =(2200000-1000000)*10.64%=127680

Avoidable interest = 120000+127680=247680

Total interest incurred = 120000+200000+385000=705000

Lower of avoidable interest or total interest should be capitalize that is 247680

Date payments fund used annualised 1-march 1800000 10

1500000

(1800000*10/12)

1-June 1200000 7

700000

(1200000*7/12)

31-December 3000000 0 0 Total qualifying for interest capitalization 6000000 2200000

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