Use the following information to solve the following questions:
On March 1, 2020, Mauritania Ltd. purchased land for $ 270,000 cash, which they intend to use for their new head office. Construction on the office building began on March 1. The following expenditures were incurred for construction:
$$\begin{array} { l l }
\text { Date } & \text { Expenditures } \
\text { March } 1,2020 &\$450,000\
\text { April } 1,2020 & \mathbf { 2 5 2 , 0 0 0 } \
\text { May } 1,2020 & 450,000 \
\text { June } 1,2020 & 720,000
\end{array}$$ The office building was completed and ready for occupancy on July 1. To help pay for construction, Mauritania borrowed $ 360,000 on March 1, 2020, on a 9%, three-year note payable. Other than this note, the only other debt outstanding during 2020 was a $ 150,000, 10%, six-year note payable dated January 1, 2019.
-The actual interest cost incurred during 2020 was
A) $ 27,000.
B) $ 39,500.
C) $ 42,000.
D) $ 47,400.

Question

Use the following information to solve the following questions: 
On March 1, 2020, Mauritania Ltd. purchased land for $ 270,000 cash, which they intend to use for their new head office. Construction on the office building began on March 1. The following expenditures were incurred for construction:
 $$\begin{array} { l l } 
\text { Date } & \text { Expenditures } \
\text { March } 1,2020 &\$450,000\
\text { April } 1,2020 & \mathbf { 2 5 2 , 0 0 0 } \
\text { May } 1,2020 & 450,000 \
\text { June } 1,2020 & 720,000
\end{array}$$ The office building was completed and ready for occupancy on July 1. To help pay for construction, Mauritania borrowed $ 360,000 on March 1, 2020, on a 9%, three-year note payable. Other than this note, the only other debt outstanding during 2020 was a $ 150,000, 10%, six-year note payable dated January 1, 2019.
-The actual interest cost incurred during 2020 was
A) $ 27,000.
B) $ 39,500.
C) $ 42,000.
D) $ 47,400.

Quizplus · Accepted Answer

To find the actual interest cost incurred during 2020, we need to find the weighted average interest rate of the two notes payable and then multiply it by the average amount of funds borrowed during the year.

Weighted average interest rate:
For the $360,000 note payable:
Principal = $360,000
Interest rate = 9%
Time = 10/12 (since the note was issued on March 1 and interest accrues for 10 months in 2020)

Interest on this note payable = $360,000 × 9% × 10/12 = $27,000

For the $150,000 note payable:
Principal = $150,000
Interest rate = 10%
Time = 12/12 (since the note has been outstanding since January 1, 2020, and interest accrues for the whole year)

Interest on this note payable = $150,000 × 10% = $15,000

Total interest cost = $27,000 + $15,000 = $42,000

Average amount of funds borrowed during the year:
To find the average amount of funds borrowed during the year, we need to take the sum of the funds borrowed and divide it by the number of borrowing periods.

Sum of funds borrowed = $360,000 (from the note payable)
Average amount of funds borrowed = ($360,000 + $252,000 + $450,000 + $720,000) ÷ 4 = $445,500

Therefore, the actual interest cost incurred during 2020 is $42,000, which is the correct answer.

Use the Following Information to Solve the Following Questions The Office Building Was Completed and Ready for Occupancy on