Question

LarkspurFurniture 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. Larkspur expected to complete the building by December 31, 2020. Larkspur 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

A. Assume that Larkspur 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

$

B. Compute the depreciation expense for the year ended December 31, 2021. Larkspur 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

$

Answer 1

Answer :-

a)

Weighted average interest rate of all other debt (Other than specific loan)

Debt	Amount	Interest rate	Interest amount
12% Loan	1,680,000	12%	$201,600
13% Loan	1,200,000	13%	$156,000
	2,880,000		$357,600

Weighted avg rate = 357,600/ 2,880,000 x 100 = 12.4166 %

Computation of Avoidable interest

	Average	Interest rate	Avoidable interest
Avg accumulated expenditure	4,320,000
From:
Specific Loan interest	2,400,000	14%	336,000
Other debt interest	1,920,000	12.4166%	238,399
Total avoidable interest			574,399

b)

Actual interest

Construction loan	$2,400,000	×	14%	=	$336,000
Short term loan	$1,680,000	×	12%	=	$201,600
Long term loan	$1,200,000	×	13%	=	$156,000
Total					$693,600

We use avoidable interest, because avoidable interest is lower than actual interest.

Cost	$6,240,000
Interest captialized	$574,399
Total cost	$6,814,399

Depreciation expenses =$6,814,399 - $360,000 / 30 years

=$6,454,399 /30 years

=$215,146 .63or $215,147.00