Question

Acquisition and Disposition of Property, Plant, and Equipment Instructions Prepare the entry that should have been made at the date of each ac made at the date of each acquisition. (LO 2) (Capitalization of Interest) Harrisburg Furniture Compa of a combination office and warehouse building for its own January 1, 2020. Harrisburg expected to complete the building by December 31, following debt obligations outstanding during the construction period. sburg Furniture Company started construction "Bor its own use at an estimated cost of $5,000,00 ron te the building by December 31, 2020. Harrisburg has che onden 01Construction 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 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. f Interest) An December 31, 2019, Main Inc. borrowed $3,000,000

Answer 1

Part A

Weighted-Average Accumulated Expenditures	X	Interest Rate	=	Avoidable Interest
2000000		12%		240000
1600000		10.42%		166720
3600000				$406720

Weighted-average interest rate computation	Principal	Interest
10% short-term loan	1400000	140000
11% long-term loan	1000000	110000
	2400000	250000

            Weighted-average interest rate = 250000/2400000 = 10.42%

Part B

		Actual Interest
Construction loan	$2,000,000 X 12% =	240000
Short-term loan	$1,400,000 X 10% =	140000
Long-term loan	$1,000,000 X 11% =	110000
	Total	$490000

Avoidable interest < actual interest, and thus avoidable interest is capitalized

Cost = 5200000+406720 = $5606720

Depreciation expense = (5606720-300000)/30 = $176891