Question

The Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $14,500,000 on January 1, 2020. The Furniture Company expected to complete the building by December 31, 2020. The Furniture Company has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $5,800,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 4,060,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,900,000 Assume that Ayayai completed the office and warehouse building on December 31, 2020, as planned at a total cost of $15,080,000, and the weighted-average amount of accumulated expenditures was $10,440,000. 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 $ 10.416 LINK TO TEXT Compute the depreciation expense for the year ended December 31, 2021. Ayayai 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 $870,000. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $

Answer 1

Information available in the Question :

1. Planned Cost of Office : $15,080,000

2. Weighted-average amount of accumulated expenditures : $10,440,000

3. Salvage Value : $870,000

4. Useful Life : 30 Years

5. Construction Loan – 12 %      : $ 58,00,000

6. Short Term Loan – 10%       : $ 40,60,000

7. Long Term Loan – 11%       : $ 29,00,000

Solution 1:

Weighted average interest rate on general borrowings = 10%* $4,060,000 /$6,960,000 + 11%* $2,900,000 / $6,960,000

= 10.42%

Avoidable interest = ($5,800,000*12%) + ($10,440,000 - $5,800,000) * 10.42%

= $696,000 + $483,488 = $1,179,488

Therefore, Avoidable interest on this project is $ 1,179,488

Solution 2:

Total cost of Building = Total Planned Cost + Interest Cost

Total cost of building = $15,080,000 + $1,179,488 = $16,259,488

Depreciation expense = (Cost - Salvage value) / Useful life

Depreciation expense = ($16,259,488 - $870,000)/30 = $512,983

Therefore , Depreciation Expenses for 2021 is $ 512,983