Answer:
Ayayai Furniture Company
The avoidable interest on this project is:
= $250,909.44
Explanation:
a) Data and Calculations:
Estimated cost of construction = $3,000,000
Construction started on January 1, 2020
Construction expected to complete by December 31, 2020
Debt obligations outstanding:
Construction loan-12% interest, payable semiannually, issued December 31, 2019 $1,200,000
Annual interest payment = $144,000 ($1,200,000 * 12%)
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 840,000;
Annual interest payment = $84,000 ($840,000 * 10%)
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 600,000
Annual interest payment = $66,000 ($600,000 * 11%)
Total debt obligations = $2,640,000
Total interest payment = $294,000
Weighted average interest rate = $294,000/2,640,000 = 0.111364
Total cost of construction incurred = $3,120,000
Weighted average amount of accumulated expenditure = $2,160,000
Avoidable interest = Construction loan *12% + (Weighted Average Accumulated Expenditures - Construction loan) *Weighted average interest rate
= $1,200,000 * 12% + ($2,160,000 - $1,200,000) * 11.1364%
= $144,000 + (960,000 *11.1364%)
= $144,000 + $106,909.44
= $250,909.44
b) Avoidable interest is the interest that would not have been incurred assuming that this combination office and warehouse building project was not carried out.
