Arlington Company is constructing a building

Accounting Jan 16, 2021

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $6,400,000 on March 1, $5,280,000 on June 1, and $8,000,000 on December 31. Arlington Company borrowed $3,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $6,400,000 note payable and an 11%, 4-year, $12,000,000 note payable.

What is the avoidable interest for Arlington Company (choose the closest number)?

Expert Solution

Weighted average interest rate on general borrowings = ($6,400,000*10% + $12,000,000*11%)/($6,400,000+$12,000,000) = 10.65%

Interest for specific borrowing should be capitalized for entire year.

Avoidable Interest = ($3,200,000*12%) + ($8,413,333 - $3,200,000) * 10.65% = $939,220

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