Blue furniture company started construction of a combination office and warehouse building for its own use at an estimated cost of $11,000,000 on january 1, 2020. blue expected to complete the building by december 31, 2020. blue has the following debt obligations outstanding during the construction period. construction loan-12% interest, payable semiannually, issued december 31, 2019 $4,400,000 short-term loan-10% interest, payable monthly, and principal payable at maturity on may 30, 2021 3,080,000 long-term loan-11% interest, payable on january 1 of each year. principal payable on january 1, 2024 2,200,000

The company will first determinate the capitalize expenditures.

Then, subtrac the specifit borrowing

and use a weighted average rate of 10.42% for the amount of capitalized expenditures above the especific borrowings.

Adding the specfit borowing interest and the interest from the average rate we will get the avoidable interest.

Explanation:

The company will avoind interest for the amount of specific borrowing:

especific borrowings

$4,400,000 at 12% annual rate  528,000.00    

And then, calculate the average rate of their outstanding debt  

average rate  

principalrateinterest

3,080,0000.1308000

2,200,0000.11242000

5,280,000  550000

total interest / total principal  0.104166667

and use that rate for the amount of capitalized expenditures above the especific borrowings.

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