Carla Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $6,000,000 on January 1, 2020. Carla expected to complete the building by December 31, 2020. Carla has the following debt obligations outstanding during the construction period.
Construction loan-14% interest, payable semiannually, issued December 31, 2019 | $2,400,000 | |
Short-term loan-12% interest, payable monthly, and principal payable at maturity on May 30, 2021 | 1,680,000 | |
Long-term loan-13% interest, payable on January 1 of each year. Principal payable on January 1, 2024 | 1,200,000 |
Assume that Carla completed the office and warehouse building on December 31, 2020, as planned at a total cost of $6,240,000, and the weighted-average amount of accumulated expenditures was $4,320,000. 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 |
$ |
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Compute the depreciation expense for the year ended December 31, 2021. Carla 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 $360,000. (Round answer to 0 decimal places, e.g. 5,275.)
Depreciation Expense |
$ |
Part A
Avoidable interest = $574464
Weighted-Average Accumulated Expenditures |
X |
Interest Rate |
= |
Avoidable Interest |
2400000 |
14% |
336000 |
||
1920000 |
12.42% |
238464 |
||
4320000 |
574464 |
Weighted-average interest rate computation |
Principal |
Interest |
12% short-term loan |
1680000 |
201600 (1680000*12%) |
13% long-term loan |
1200000 |
156000 (1200000*13%) |
2880000 |
357600 |
Weighted-average interest rate = total interest / total principal = 357600/2880000 = 12.42%
Part B
Depreciation Expense = $215149
Actual interest |
||
Construction loan |
2400000*12% = |
648000 |
Short-term loan |
1680000*10% = |
201600 |
Long-term loan |
1200000*11% = |
156000 |
$1005600 |
Avoidable interest being lower than actual interest, avoidable interest is considered to calculate total cost.
Total cost = cost + interest capitalized = 6240000+574464 = 6814464
Depreciation Expense = (68144664-360000)/30 = $215149
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