E10-4B (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
$1,000,000
15%
$150,000
800,000
10.42%
83,360
$233,360
Weighted-average interest rate computation
Principal
Interest
10% short-term loan
$
700,000
$
70,000
11% long-term loan
500,000
55,000
$1,200,000
$125,000
Total interest
=
$125,000
= 10.42%
Total principal
$1,200,000
(b)
Actual Interest
Construction loan
$1,000,000 X 15% =
$150,000
Short-term loan
$700,000 X 10% =
70,000
Long-term loan
$500,000 X 11% =
55,000
Total
$275,000
Because avoidable interest in lower than actual interest, use avoidable
interest.
Cost
$2,600,000
Interest capitalized
233,360
Total cost
$2,833,360
Depreciation expense=
$2,833,360 – $150,000
= $89,445
30 years
10-3