Coronado Furniture Company started construction of a combination
office and warehouse building for its own use at an estimated cost
of $7,500,000 on January 1, 2020. Coronado expected to complete the
building by December 31, 2020. Coronado has the following debt
obligations outstanding during the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2019 | $3,000,000 | |
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 | 2,100,000 | |
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 | 1,500,000 |
Assume that Coronado completed the office and warehouse building on December 31, 2020, as planned at a total cost of $7,800,000, and the weighted-average amount of accumulated expenditures was $5,400,000. Compute the avoidable interest on this project.
Compute the depreciation expense for the year ended December 31, 2021. Coronado 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 $450,000.
Calculation of weighted average interest rate: | |||
Type of loan | Principal | Interest Rate | Interest |
Short Term Loan-10% Interest | 2,100,000 | 10% | 210,000 |
Long Term Loan-11% Interest | 1,500,000 | 11% | 165,000 |
Total | 3,600,000 | 375,000 | |
Weighted Average Interest Rate= | Total Interest / Total Principal | ||
=375000/3600000 | |||
=10.42% | |||
Available Interest Calculation: | |||
Particulars | Principal Balance of Weighted Average Accumulated Expenditure | Interest Rate | Available Interest |
Interest on Loan specifically for Contruction | 3,000,000 | 12% | 360,000 |
Interest on remaining loan upto weighted average expenditure total using weighted average interest rate | 2,400,000 | 10.42% | 250,080 |
Total | 5,400,000 | 610,080 | |
Available Interest | $ 610,080 | ||
Calculation of Depreciation Expense: | |||
Total Cost | =Cost Incurred + Interest Capitalised | ||
=7800000+610080 | |||
=8410080 | |||
Depreciation Expense | =(Total Cost-Estimated Salvage Value)/Estimated Useful Life | ||
=(8410080-450000)/30 | |||
Depreciation Expense | =265336 | ||
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