Larkspur Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,004,000 on January 1, 2017. Larkspur expected to complete the building by December 31, 2017. Larkspur has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,990,900 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,599,600 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 995,500Assume that Larkspur completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,151,300, and the weighted-average amount of accumulated expenditures was $3,764,600. 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. Larkspur 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 $297,500. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $
Solution:
1.)
Avoidable interest:
Weighted average
Accumulated Expenditure | × | Interest Rate | = | Avoidable Interest |
$1,990,900 | × | 12% | = | $238,908 |
$1,386,700 ($5,151,300 - $3,764,600) | × | 10.38% | = | $143,939 |
$3,377,600 | $382,847 |
Weighted average interest rate computation
Principal | Interest | |
10% short term loan | $1,599,600 | $159,960 ($1,599,600 ×10%) |
11% long term loan | $995,500 | $109,505 ($995,500 × 11%) |
Total | $2,595,100 | $269,465 |
Interest rate | Total interest / Total principal | $269,465 / $2,595,100 = 10.38% |
2.)
Actual interest
Construction loan | $1,990,900 | × | 12% | = | $238,908 |
Short term loan | $1,599,600 | × | 11% | = | $175,956 |
Long term loan | $995,500 | × | 10% | = | 99,550 |
Total | $514,414 |
We use avoidable interest, because avoidable interest is lower than actual interest.
Cost | $5,151,300 |
Interest captialized | $382,847 |
Total cost | $5,534,147 |
Depreciation expenses =$5,534,147 -$297,500 / 30 years
=$5,236,647/30 years
=$174,554.90 or $174,555
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