Question

In: Accounting

h. The storage building was self-constructed this year by Accounting Creations. The Company had their initial...

h. The storage building was self-constructed this year by Accounting Creations. The Company had their initial expenditure of $500,000 on January 1. They paid an additional $375,000 on May 1st, $250,000 on August 1st, and then the final payment of $150,000 on December 1st when the building was completed and occupancy occurred. The company has decided to use S/L method for depreciation. The storage building is estimated to have a life of 40 years and a salvage value of $77,006. The company depreciates using partial years (Hint: (1) only consider depreciation expense after the completion of the construction; (2) use the avoidable interest computed from i).

i. Accounting Creations Double Entry has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st. The facts on each loan are as follows: Onstar Bank Loan – outstanding since January 1, 2018 with a 4.0% interest rate. This loan was taken out to finance the construction of the Storage Building. Interest for the year and 10% of the principle will be paid to the bank on January 1, 2019. Except for recording the initial cash received and loan, no additional entries have been made. Coldstar Bank Loan – also outstanding all of 2018 with 3.06% interest rate. Interest is due on January 1, 2019. Principle is due on January 1, 2024. Since interest will not be paid to the Bank until 2019, Accounting Creations’ office staff did not accrue any interest.

How do you go about finding depreciation and interest for these journal entries?

Solutions

Expert Solution

Computation of Depreciation and interest
Date Expediture incurred Onstar Bank Loan Intrest to be capitalized Coldstar Bank Loan Intrest to be capitalized Total
Jan. 01 500,000.00 250,000.00 9,166.67 250,000.00 7,012.50
(250,000 x 4% x(11 month/12 month) (250,000 x 3.06% x(11 month/12 month)
May. 01 375,000.00 187,500.00 4,375.00 187,500.00 3,346.88
(250,000 x 4% x(7 month/12 month) (250,000 x 3.06% x(7 month/12 month)
Aug. 01 250,000.00 125,000.00 1,666.67 125,000.00 1,275.00
(250,000 x 4% x(4 month/12 month) (250,000 x 3.06% x(4 month/12 month)
Dec. 01 150,000.00 75,000.00 0.00 75,000.00 0.00
Total 1,275,000.00 15,208.33 11,634.38 1,301,842.71
Total cost of building including pre completion interest cost = $1,301,84.71
Depreciation for the year 2018 = (1,301,842.71-77,006)*1 month/480 months = $2,551.74
(40 years x 12 month = 480 months)
NOTE:
Interest on loan upto date of completion of building will be part of cost of building and therefore we considered interest only upto 30th November as building is completed and occupied on 1st December, 2018.
Interest after the date of completion and occupancy of building would be charged as revenue expenses.
Depreciation is computed for only month of December, 2018.

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