Question

Company A had a storage building constructed for its own use during 2018. The building was completed in October 1. Total expenditures on the building were $3,500,000 and the weighted-average-accumulated expenditures were $2,400,000. To help finance the construction Company A took out a construction loan of $1,500,000. This loan carried a 5% interest rate. Company A's other construction loan includes a $1,000,000, 6% notes payable and $3,000,000 of 8% bonds.

A) Determine the amount of interest Company A should capitalize on the building. (round interest rates to three decimal places, e.g. X.X%)

B) Assuming the building is expected to have a 20-year life and a salvage value, compute straight-line depreciation for 2019.

Answer 1

Solution 1:

Weighted average interest rate on general borrowings = 6%* $1,000,000 /$4,000,000 + 8%* $3,000,000 / $4,000,000

= 7.50%

Amount of interest to be capitalized = ($1,500,000*5%) + ($2,400,000 - $1,500,000) * 7.50%

= $142,500

Solution 2:

Total cost of building = $3,500,000 + $142,500 = $3,642,500

Depreciation expense for 2019 = (Cost - Salvage value) / Useful life = ($3,642,500 - $0/20 = $182,125