Question

Coronado Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $14,500,000 on January 1, 2020. Coronado expected to complete the building by December 31, 2020. Coronado has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019		$5,800,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021		4,060,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024		2,900,000

Assume that Coronado completed the office and warehouse building on December 31, 2020, as planned at a total cost of $15,080,000, and the weighted-average amount of accumulated expenditures was $10,440,000. 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, 2021. Coronado 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 $870,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

$

Answer 1

Solution 1:

Weighted average interest rate on general borrowings = 10%* $4,060,000 /$6,960,000 + 11%* $2,900,000 / $6,960,000

= 10.42%

Avoidable interest = ($5,800,000*12%) + ($10,440,000 - $5,800,000) * 10.42%

= $696,000 + $483,488 = $1,179,488

Solution 2:

Total cost of building = $15,080,000 + $1,179,488 = $16,259,488

Depreciation expense for 2021 = (Cost - Salvage value) / Useful life = ($16,259,488 - $870,000)/30 = $512,983