E10.7B (L0 2) (Capitalization of Interest) Bagwell Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $2,500,000 on January 1, 2020. Bagwell expected to complete the building by December 31, 2020. Bagwell has the following debt obligations outstanding during the construction period.
Construction loan—15% interest, payable semiannually, issued |
|
December 31, 2019 Short-term loan—10% interest, payable monthly, and principal payable |
$1,000,000 |
at maturity on May 30, 2021 Long-term loan—11% interest, payable on January 1 of each |
700,000 |
year. Principal payable on January 1, 2024 |
500,000 |
Instructions
(Carry all computations to two decimal places.)
Part 1
Average Accumulated capital Expenditure | $ 1,800,000 | ||
Weighted average rate for other debt | |||
Amount of debt | Multiply: Rate | Interest | |
Short-term loan | $ 700,000 | 10.00% | $ 70,000 |
Long-term loan | $ 500,000 | 11.00% | $ 55,000 |
Total | $ 1,200,000 | $ 125,000 | |
Weighted average rate for other debt (Total interest/Total other debts ) (rounded to two Decimal place.) |
$ 125,000 | $ 1,200,000 | 10.42% |
Average Accumulated capital Expenditure | Rate | Avoidable interest | |
For construction loan | $ 1,000,000 | 15.00% | $ 150,000 |
Other debt (1800000-1000000) | $ 800,000 | 10.42% | $ 83,360 |
Total | $ 1,800,000 | $ 233,360 | |
Avoidable interest | $ 233,360 |
Part 2
Actual interest incurred during year 2020 | |||
Debt type | Amount of debt | Rate | Actual interest |
Short-term loan | $ 700,000 | 10% | $ 70,000 |
Long-term loan | $ 500,000 | 11% | $ 55,000 |
For construction loan | $ 1,000,000 | 15% | $ 150,000 |
Actual interest incurred during year 2020 | $ 275,000 | ||
Avoidable Interest | $ 233,360 | ||
Actual interest incurred during year 2020 | $ 275,000 | ||
Interest cost to be capitalized (Whichever is lower) | $ 233,360 | ||
Total cost | $ 2,600,000 | ||
Add: Interest cost to be capitalized | $ 233,360 | ||
Total Cost of Assets | $ 2,833,360 | ||
Less: Salvage Value | $ 150,000 | ||
Depreciable Cost | $ 2,683,360 | ||
Divided by: Useful life | 30 | ||
Depreciation Expense | $ 89,445 |
E10.7B (L0 2) (Capitalization of Interest) Bagwell Furniture Company started construction of a combination office and...
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