a) Construction loan is specific loan, therefore the whole amount of interest on construction loan is included in avoidable interest and for other two borrowings, we need to calculate weighted average interest rate which is calculated as follows:-
Calculation of Weighted Average Interest Rate (Amounts in $)
Loan | Amount of Loan (A) | Interest rate (B) | Interest expense (A*B) |
Short Term loan | 1,606,700 | 8% | 128,536 |
Long Term loan | 993,300 | 9% | 89,397 |
Total | 2,600,000 | 217,933 |
Weighted Average Interest Rate = Total interest on General loan/Total Amount of General Loan
= ($217,933/$2,600,000)*100 = 8.38%
Calculation of Avoidable Interest (Amounts in $)
Interest on Construction Loan (2,015,800*10%) | 201,580 |
Interest on Balance Accumulated Expenditure [(3,810,800-2,015,800)*8.38%] | 150,421 |
Total Avoidable Interest | 352,001 |
Therefore avoidable interest on this project is $352,001 (It will be capitalized to the cost of building).
b) Cost of Building = $5,195,900+$352,001 = $5,547,901
Depreciation Expense under Straight line = (Cost - Salvage Value)/Useful Life in yrs
= ($5,547,901-$299,200)/30 yrs = $174,957
Therefore the depreciation expense for the year ended December 31, 2018 is $174,957.
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