Question

quisition and Disposition of Property, Plant, and Equipment Instructions Prepare the entry that should have been made at the dat E10.7 (LO 2) (Capitalization of Interest) Harrisburg of a combination office and warehouse building for its own use at an estimates January 1, 2020. Harrisburg expected to complete the building by Decem arrisburg expected to complete the building by December 31, 2020. Harrisburg nasce following debt obligations outstanding during the construction period. anization of Interest) Harrisburg Furniture Company started construction 8 for its own use at an estimated cost of $5,000,00 ron oides 01 Construction loan-12% interest, payable semiannually, issued December 31, 2019 Short-term loan-10% interest, payable monthly, and principal payable $2,000,000 at maturity on May 30, 2021 For 1,400,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,000,000 Instructions (Carry all computations to two decimal places.) a. Assume that Harrisburg completed the office and warehouse building on December 31, 2020, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expendi- tures was $3,600,000. Compute the avoidable interest on this project. b. Compute the depreciation expense for the year ended December 31, 2021. Harrisburg 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 $300,000. Tulud 2000 m

Answer 1

Requirement 1

The construction loan is specific loan attributed to construction of building and not avoidable.

The other loans of short term and long term nature needs to be checked out as they are general loan.

Computation of weighted average interest rate

	Principal	Interest
10% short term loan	$        1,400,000	$ 140,000
11% long term loan	$        1,000,000	$ 110,000
	$        2,400,000	$ 250,000

weighted average interest rate = 250,000/2400,000 = 10.42%

Computation of avoidable interest :

Weighted average Accumulated expenditures	Interest rate	Avoidable Interest
A	B	A X B
2,000,000	12%	$                       240,000
3,600,000 – 2,000,000 = 1600,000	10.42%	$                       166,667
$                                         3,600,000		$                   406,667

Hence, avoidable interest is $ 406,667

Requirement 2

Computation of actual interest

	Principal	Interest
12% construction loan	$        2,000,000	$                       240,000
10% short term loan	$        1,400,000	$                       140,000
11% long term loan	$        1,000,000	$                       110,000
	$      4,400,000	$                   490,000

As per accounting standard. If, avoidable interest is lower than actual interest, avoidable interest shall be capitalized to the cost of asset.

Total cost of building = 5,200,000 + 406,667 = $ 5,606,667

Depreciation expense = (Cost- salvage value)/Useful life = (5,606,667 – 300,000)/30 = $ 176,889 Hence, required depreciation expense = $ 176,889.

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