Question

Oriole Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $13,500,000 on January 1, 2020. Oriole expected to complete the building by December 31, 2020. Oriole has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $5,400,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 3,780,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,700,000

Assume that Oriole completed the office and warehouse building on December 31, 2020, as planned at a total cost of $14,040,000, and the weighted-average amount of accumulated expenditures was $9,720,000. 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 $

Compute the depreciation expense for the year ended December 31, 2021. Oriole 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 $810,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

$

Answer 1

Answer :-

Avoidable interest on this project -

Particular	Weighted-average accumulated expenditures (a)	Interest rate (b)	Avoidable Interest (a × b )
Interest on loan for Construction	$5,400,000	12%	$648,000
Interest on remaining loan calculated on weighted-average rate( $9,720,000 - $5,400,000 )	$4,320,000	10.42% (Note - 1)	$450,144
Total	$9,720,000		$1,098,144

Note - Calculation of weighted-average rate

Loan type	Loan Amount	Interest rate	Interest (Loan Amount × Interest rate)
Short-term Loan	$3,780,000	10%	$378,000
Long -term loan	$2,700,000	11%	$297,000
Total	$6,480,000		$675,000

Weighted-average rate = Total Interest / Total Loan Amount

Weighted-average rate = $675,000/ $6,480,000

Weighted-average rate = 10.42%

.

Computation of the depreciation expense for the year ended December 31, 2021 -

Oriole select straight line method for Depreciation

First we calculated Actual Interest Debt obligation outstanding during the construction period.

Loan type	Loan Amount	Interest rate	Interest (Loan Amount × Interest rate)
Construction loan	$5,400,000	12%	$648,000
Short-term Loan	$3,780,000	10%	$378,000
Long -term loan	$2,700,000	11%	$297,000
Total			$1,323,000

Since Avoidable Interest is lower than Actual Interest so we take Avoidable Interest to calculate the total cost of building.

Total cost of Building = Total cost + Avoidable Interest

Total cost = $14,040,000 + $1,098,144

Total cost of building = $15,138,144

Useful life of Building = 30 years

salvage value = $810,000

Deprecation expense = (Total cost of building - Salvage value) / Useful life of Building

Deprecation expense = ($15,138,144 - $810,000 ) / 30

Deprecation expense = $477,6 04.8