Solutions to Property, Plant & Equipment Practice Problems
EXERCISE 10-7 (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X Interest Rate = Avoidable Interest
$2,000,000
12%
$240,000
1,800,000
10.38%
186,840
$3,800,000
$426,840
Weighted-average interest rate computation
Principal
Interest
10% short-term loan
$1,600,000
$160,000
11% long-term loan
1,000,000
110,000
$2,600,000
$270,000
Total Interest
=
$270,000
= 10.38%
Total Principal
$2,600,000
(b)
Actual Interest
Construction loan
$2,000,000 X 12% =
$240,000
Short-term loan
$1,600,000 X 10% =
160,000
Long-term loan
$1,000,000 X 11% =
110,000
Total
$510,000
Because avoidable interest is lower than actual interest, use
avoidable interest.
Cost
$5,200,000
Interest capitalized
426,840
Total cost
$5,626,840
Depreciation Expense =
$5,626,840 – $300,000
= $177,561
30 years