Rose Bottling started construction of a warehouse building for its own use at an estimated cost of $ 6,000,000 on January 1, 2016 and completed the building on December 31, 2016. During the construction period, the firm had the following debt outstanding:

Construction loan 11% interest payable semiannually,

issued 12/31/15 $ 2,500,000

Short-term loan 9% interest payable monthly and

principal payable at maturity 07/31/17 1,700,000

Long-term loan 7% interest payable on 01/01 of

each year, principal payable on 01/01/20 1,300,000

Total cost amounted to $ 6,150,000 and the weighted average accumulated expenditures were $ 4,100,000.

K. Rose, the CEO of the company, has been shown the costs associated with this construction project and capitalized on the balance sheet. She is bothered by the avoidable interest included in the cost. She argues that all of the interest is unavoidable since no one lends money without expecting to be compensated for it. She cannot understand why the company cannot use all the interest on all the loans when computing this avoidable interest. Shouldnt her company be able to capitalize all the annual interest cost that accrued over the period of construction?

You are the Controller for the company. Prepare a memo (TYPED in good form) explaining when interest capitalization is appropriate, what avoidable interest is and how it is computed (being especially careful to explain the interest rate(s) that are used). If the company cannot capitalize all its interest for the year, explain why. Also indicate the total amount for which the project should be capitalized. Be sure to attach schedule(s) supporting any computations you use and reference the schedule(s) in your memo. (Round to 4 decimal places!)