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 $1,824,000 on March 1, $1,212,000 on June 1, and $3,057,100 on December 31.

Hanson Company borrowed $1,198,100 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 9%, 5-year, $2,141,300 note payable and an 10%, 4-year, $3,759,300 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Explanation / Answer

In Order to Compute the weighted-average interest rate used for interest capitalization purposes we need to find the accumulated Expenditure as per Weightage considering the period in which they were incurred. Below Table shows the computation as per the months.

Now, Out of above total $2126000 of Average Expenditure $998417 is financed by specific loan as this was taken in March 1, need to Calculated as below (Table 2 ) for 10 Months proportionally. Rest (2126000 - 998417) ie 1127583 is financed by the General Loans for which we need to calculate Weighted Average Interest Rate shown in the Table 3

Weighted interest rate on the general loans is calculated below. This is for full year so months does not matter.

Weighted-average Interest Rate from above table 3 = 568647/5900600 = 9.637 %.on General Debt.

Table 1 A B C A X C Expenditure Date Amount Period in Months Capitalized Weightage            ( Period (B)/ 12 ) Expenditure as per Weightage 1-Mar 1,824,000 10 0.833 1520000 1-Jun 1,212,000 6 0.500 606000 31-Dec 3,057,100 0 0 0 Yearly Total 6,093,100 2,126,000

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