Question

Kendall borrowed $782,000 on a construction loan at 10% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,660,000 in 7% bonds payable outstanding in 2021 and 2022. Interest (using the weighted-average method) capitalized for 2021 was:

Answer 1

Missing information:

Payments made during 2021:

• January 1, $200,000
• September 30, $300,000
• December 31, $300,000

Answer:

$20,435.50

Explanation:

the weighted average method for calculating interest expense calculates weighted interest rates based on the interest expense of more than one outstanding debt:

• $782,000 x 10% = $78,200
• $4,660,000 x 7% = $326,200
• total interest expense = $404,400

weighted interest rate = $404,400 / ($782,000 + $4,660,000) = 7.4311%

average accumulated expenditure:

January 1: $200,000 x 12/12 = $200,000

September 30: $300,000 x 3/12 = $75,000

December 31: $300,000 x 0/12 = $0

total = $275,000

interest expense = $275,000 x 7.4311% = $20,435.50