Question

Question 2 View Policies Show Attempt History Current Attempt in Progress Ivanhoe Furniture Company started construction of a combination office and warehouse building for its own use at ar estimated cost of $6,000,000 on January 1, 2020. Ivanhoe expected to complete the building by December 31, 2020. Ivanhoe has the following debt obligations outstanding during the construction period. Construction loan-14 % interest, payable semiannually, issued December 31, 2019 Short-term loan-129% interest, payable monthly, and principal payable at maturity on May 30, 2021 Long-term loan-13 % interest, payable on January 1 of each year. Principal payable on January 1, 2024 $2,400,000 1,680,000 1,200,000 Assume that Ivanhoe completed the office and warehouse building on December 31, 2020, as planned at a total cost of $6,240,000, and the weighted-average amount of accumulated expenditures was $4,320,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, es. 7.58% for computational purposes and round final answers to O decimal places, eg. 5,275.) Avoidable Interest $ 830680 eTextbook and Media x Your answer is incorrect. Compute the depreciation expense for the year ended December 31, 2021. Ivanhoe 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 $360,000. (Round answer to 0 decimal places, e.g. 5,275.) 223689 Depreciation Expense $

Answer 1

The avoidable interest is simply the interest that would have been avoided if the expenditure on the asset had not been made. So If the building is not constructed then the avoidable interest is calculated as:

Avoidable Interest = Capitalized Interest on Construction Loan + Capitalized Interest on Short Term Loan

= ($24,00,000 * 14%) + ($16,80,000 * 12% * 11/12)

= $3,36,000 + $1,84,800

= $5,20,800

Note:- (i) Interest on Construction Loan should be capitalized full year as it is issued on 31st December 2019 and interest is payable semiannually dated 30th June 2020 and 31st December 2020.

(ii) Interest on Short Term Loan should be capitalized only for 11 months as it is issued on 1st January 2020 and Interest is payable monthly. So the Last Monthly installment of this year will be made on 1st January 2021.

(iii) Interest on Long Term Loan should not be capitalized because it is issued on 1st January 2020 and Interest is payable on 1st January of every year. So Interest will be made on 1st January 2021.

Depreciation Expense for the year ended 31st December 2021 are:

Depreciation Expense = (Total Amount of Building - Salvage Value) / Useful Life

= ($67,60,800 - $3,60,000) / 30 Years

= $2,13,360

Notes : (i) Total Amount of Building = Total Cost Incurred + Capitalized Value of Interest on Loans

= $62,40,000 + $5,20,800

= $67,60,800