Blue Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $11,000,000 on January 1, 2020. Blue expected to complete the building by December 31, 2020. Blue has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $4,400,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 3,080,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,200,000

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TomShelby TomShelby · Answer 1 · 2020-01-23T20:24:00+01:00

Answer:

The company will first determinate the capitalize expenditures.

Then, subtrac the specifit borrowing

and use a weighted average rate of 10.42% for the amount of capitalized expenditures above the especific borrowings.

Adding the specfit borowing interest and the interest from the average rate we will get the avoidable interest.

Explanation:

The company will avoind interest for the amount of specific borrowing:

especific borrowings

$4,400,000 at 12% annual rate 528,000.00

And then, calculate the average rate of their outstanding debt

average rate

principal rate interest

3,080,000 0.1 308000

2,200,000 0.11 242000

5,280,000 550000

total interest / total principal 0.104166667

and use that rate for the amount of capitalized expenditures above the especific borrowings.