Question

Stellar 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. Stellar expected to complete the building by December 31, 2020. Stellar has the following debt obligations outstanding during the construction period. $4,400,000 Construction loan-12% interest, payable semiannually, issued December 31, 2019 3,080,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,200,000 Assume that Stellar completed the office and warehouse building on December 31, 2020, as planned at a total cost of $11,440,000, and the weighted-average amount of accumulated expenditures was $7,920,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, e.g. 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.) Avoidable Interest $

Answer 1

1) Avoidable interest on construction loan = Loan Amount*Loan rate

= $4,400,000*12% = $528,000

Calculation of Weighted Average Interest Rate on General Loan (Amounts in $)

Loan	Amount (A)	Interest rate (B)	Interest (A*B)
Short term loan	3,080,000	10%	308,000
Long term loan	2,200,000	11%	242,000
Total	5,280,000		550,000

Weighted Average Interest rate = $550,000/$5,280,000 = 10.42%

Avoidable Interest on Remaining Expenditure

.= (Weighted Average Accum. Exp - Construction Loan)*Weighted Avg interest rate

= ($7,920,000 - $4,400,000)*10.42% = $366,784

Total Avoidable Interest = $528,000+$366,784 = $894,784

Therefore avoidable interest is $894,784.

2) Total cost of building capitalized = $11,440,000+$894,784

= $12,334,784

Depreciation Expense = (Cost - Salvage Value)/Useful Life

= ($12,334,784 - $660,000)/30 yrs = $389,159 per year

Therefore depreciation expense per year is $389,159.