Question

NashFurniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,500,000 on January 1, 2020. Nash expected to complete the building by December 31, 2020. Nash has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019		$1,800,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021		1,260,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024		900,000

(a)

Assume that Nash completed the office and warehouse building on December 31, 2020, as planned at a total cost of $4,680,000, and the weighted-average amount of accumulated expenditures was $3,240,000. Compute the avoidable interest on this project.

*Answer 366,000 is incorrect.

(b)

Compute the depreciation expense for the year ended December 31, 2021. Nash 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 $270,000.

Answer 1

Answer
	Explanation :
a)	The weighted average interest rate of all other debt (Other than the specific loan)
	Debt	Amount	Interest rate	Interest amount
	10% Loan	12,60,000	10%	1,26,000
	11% Loan	9,00,000	11%	99,000
		21,60,000		2,25,000
	Weighted avg rate = 225,000/21,60,000 x 100 = 10.4167%
	Computation of Avoidable interest
	Particulars	Average	Interest rate	Avoidable interest
	Avg accumulated expenditure	32,40,000
	From:
	Specific Loan interest	18,00,000	12%	2,16,000
	Other debt interest	14,40,000	10.4167%	1,50,000
	Total avoidable interest			3,66,000
b)	Depreciation expense	$135,200
	Workings:
	Straight Line method:-
	Cost of building	Total cost + Avoidable Interest
		$3,960,000 + $366,000
		$    43,26,000
	Depreciation expense	(Cost - Residual value) / useful Value
	=	($43,26,000 - $270,000) / 30 years
	=	= 135,200	per year