Question

Question 1 Waterway Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,957,500 on January 1, 2017. Waterway expected to complete the building by December 31, 2017. Waterway has the following debt obligations outstanding during the construction period. Construction loan-10% interest, payable semiannually, issued December 31, 2016 Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018 Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021 $2,015,800 1,606,700 993,300 Assume that Waterway completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,195,900, and the weighted average amount of accumulated expenditures was $3,810,800. 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, 2018. Waterway 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 $299,200. (Round answer to o decimal places, e.g. 5,275.) Depreciation Expense

Answer 1

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.