Question

Nash Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $ 4,953,300 on January 1, 2017. Nash expected to complete the building by December 31, 2017. Nash has the following debt obligations outstanding during the construction period.

Construction loan- 12% interest, payable semiannually, issued December 31, 2016		$2,015,500
Short-term loan- 10% interest, payable monthly, and principal payable at maturity on May 30, 2018		1,609,200
Long-term loan- 11% interest, payable on January 1 of each year. Principal payable on January 1, 2021		990,400

Assume that Nash completed the office and warehouse building on December 31, 2017, as planned at a total cost of $ 5,173,700, and the weighted-average amount of accumulated expenditures was $3,830,300. 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

$

Compute the depreciation expense for the year ended December 31, 2018. 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 $ 297,500. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

Answer 1

Answer a

Working Note 1 : Computation of Wt. Avg Interest rate.

Particulars	Principal ($)	Interest ($)
Short-term loan- 10% interest	1,609,200	160,920
Long-term loan- 11% interest	990,400	108,944
Total	2,599,600	269,864
Wt. Avg Interest rate = (Total Intrest / Total Principal ) *100 = (269,864 / 2,599,600) *100		10.38 %

Working Note 2 :

Wt. Avg Accumulated Expenditures = Construction loan + Other loans (balance)

$3,830,300 = $2,015,500 + Other loans (balance)

Other loans (balance) = $1,814,800

Computation of Avoidable Interest

Wt. Avg Accumulated Expenditures [A]	Int. Rate [B]	Avoidable Interest [A*B]
$2,015,500	12%	241,860
$1,814,800 [working note 2]	10.38 % [working note 1]	188,376
Avoidable Interest		$430,236

Final Answer : Avoidable Interest = $430,236

Answer b.

Working Note.

Computation of Actula Interest.

Computation of Wt. Avg Interest rate.

Particulars	Principal ($)	Interest ($)
Short-term loan- 10% interest	1,609,200	160,920
Long-term loan- 11% interest	990,400	108,944
Construction loan- 12% interest	2,015,500	241,860
Total Interest		$511,724

Since avoidable interest is lower than actual interest , avoidable interest must be capitalize.

Total Capitalize cost of the asst = Cost incured + Avoidable interest

= $5,173,700 + $430,236 = $5,603,936

Depreciation as per straight-line basis = ( Total cost - Salvage Value ) / Estimated Useful life.

= ($5,603,936 - $297,500) / 30 years = $176,881

Final Answer : Depreciation Expense =  $176,881