Question

Flint Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,035,800 on January 1, 2017. Flint expected to complete the building by December 31, 2017. Flint has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,991,900 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,607,900 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,004,700

Assume that Flint completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,186,100, and the weighted-average amount of accumulated expenditures was $3,832,900. 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 $

Compute the depreciation expense for the year ended December 31, 2018. Flint elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $301,600. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $

Answer 1

Solution 1:

Weighted average interest rate on general borrowings = 10%* $1,607,900 /$2,612,600 + 11%* $1,004,700 / $2,612,600

= 10.38%

Avoidable interest = ($1,991,900*12%) + ($3,832,900 - $1,991,900) * 10.38%

= $239,028 + $191,096 = $430,124

Solution 2:

Total cost of building = $5,186,100 + $430,124 = $5,616,224

Depreciation expense for 2018 = (Cost - Salvage value) / Useful life = ($5,616,224 - $301,600)/30 = $177,154