Question

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $ 5,000,000 on January 1, 2020. Harrisburg expected to complete the building by December 31, 2020. Harrisburg has the following debt obligations outstanding during the construction period. Construction loan- 12% interest, payable semiannually, issued December 31, 2019 $ 2,000,000 Short-term loan- 10% interest, payable monthly, and principal payable at maturity on May 30, 2021 1,400,000 Long-term loan- 11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,000,000
Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. 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.)
Compute the depreciation expense for the year ended December 31, 2018. Harrisburg 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 $300,000. (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

1. The avoidable interest on this project is $406,720.

2. The depreciation expense for the year ended December 31, 2018 is $176,891.

1. Avoidable interest

First step is to calculate the Total interest expense

Short term= ($1,400,000 x 0.10)

Short term= $140,000

Long term= ($1,000,000 x 0.11)

Long term=$110,000

Total interest expense= $140,000+ $110,000

Total interest expense=$250,000

Second step is to calculate Total expenditure

Total expenditure=$1,400,000+$1,000,000

Total expenditure=$2,400,000

Third step is to calculate the Interest rate for other debt

Interest rate for other debt=($250,000/$2,400,000)

Interest rate for other debt= 10.42%

Fourth step is to calculate avoidable interest

Construction loan= ($2,000,000 x 0.12)

Construction loan=$240,000

Other debt= ($1,600,000 x 0.1042)

Other debt =$166,720

Total avoidable interest=$240,000+$166,720

Total avoidable interest=$406,720

Incocnclusion The avoidable interest on this project is $406,720.

The depreciation expense for the year ended December 31, 2018 is $176,891.

b. Depreciation expense

Total building cost=$5,200,000 +$406,720  

Total building cost =$5,606,720

Depreciation expense=($5,606,720-$300,000) / 30 years

Depreciation expense =$176,891

Inconclusion the avoidable interest on this project is $406,720 and the depreciation expense for the year ended December 31, 2018 is $176,891.

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