Question

103) (Capitalization of Inter TO LOS house building rusting by Decemb wach acquisition ation of Interest) Harrisburg Furniture Company started construction of for its own use at an estimated cost of $5,000,000 on January 1, 2017. Harrisburg expected to com Furniture Company started construction of a combination office and umber 31, 2017. Harrisburg has the follow nowing debt obligations outstanding during the construction period. Construction loan-12% Interest, payable semiannually, issued December 31, 2016 $2,000,000 Short-term loan-10interest, payable monthly, and principal payable at maturity on May 30, 2018 1,400,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,000,000 instructions Carry all comput computations to two decimal places.) be that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost 200,000, and the weighted average amount of accumulated expenditures was $3,600,000. Compute the avoidable w Assume that of $5,200,000, and interest on this project. (b) Compute the dep pute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building raight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000. ma straight-line basis and deter 000 199 nuvale annually to

Answer 1

1. Calculation of Avoidable interest

Weighted average amount of accumulated expenses: = $ 3600000 (given)

Calculation of interest rate for non-specific debt:

Loan	Loan Amount	Interest Rate	Interest
Short Term	1400000	10%	140000
Long Term	1000000	11%	110000
Total	2400000		250000

Interest rate for non-specific debt = 250000 / 2400000 = 10.42%

Calculate avoidable interest

Interest on construction loan = 2000000 x 12% = 240000

Interest on other debt = 1600000 x 10.42% = 166720

Avoidable interest = 240000 + 166720

   = 406720

2. Calculation of depreciation

Cost of building = 5200000

Avoidable interest = 406720

Total building cost = 5200000 + 406720

= 5606720

Salvage Value = 300000 (given)

Depreciation = Total building cost - Salvage Value / Useful life

= 5606720 - 300,000 / 30

= 176891