Assume that on November 1, 2016, ABC Company contracted DEF Construction Co. to
ID: 2595176 • Letter: A
Question
Assume that on November 1, 2016, ABC Company contracted DEF Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). ABC made the following payments to the construction company during 2017.
January 1 March 1 May 1 December 31 Total
$210,000 $300,000 $540,000 $450,000 $1,500,000
DEF Construction completed the building, ready for occupancy, on December 31, 2017. ABC had the following debt outstanding at December 31, 2017.
Specific Construction Debt:
15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2016, with interest payable annually on December 31
$750,000
Other Debt:
10%, 5-year note payable, dated December 31, 2013, with interest payable annually on December 31
$550,000
12%, 10-year bonds issued December 31, 2012, with interest payable annually on December 31
$600,000
The avoidable interest of ABC Company during 2017 is (choose the closest answer):
$112,500
$120,228
$239,500
$119,500
15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2016, with interest payable annually on December 31
$750,000
Other Debt:
10%, 5-year note payable, dated December 31, 2013, with interest payable annually on December 31
$550,000
12%, 10-year bonds issued December 31, 2012, with interest payable annually on December 31
$600,000
Explanation / Answer
B.) $120,228 ,
Weighted Average Accumulated Expenditure Interest rate Avoidable interest
15%, 3-year note
[Specific Construction Debt] 750,000 15% 112500
Expenditre exceeds [820000-750000] 70000 [$127000 /$1150000] =11.04% 7728
the Weighted Average Accumulated Expenditure Total $120228
Note:- Weighted Average Accumulated Expenditure:
Amount capitalisation period Weighted Average Accumulated Expenditure:
January 1 $210,000 12/12 months 210000
March 1 $300,000 10/12 months 250000
May 1 $540,000 8/12 months 360000
December 31 $450,000 0 0
Total $1,500,000 $820000
Weighted Average Interest rate :
loan amount Interest
10%, 5-year note payable $550,000 55000
12%, 10-year bonds $600,000 72000
Total $1150000 $127000